The Labor Market is a Highly Dynamic Place

Workers are constantly moving from job to job, in and out of the workforce, or from employment to unemployment and vice versa. Large firms devote substantial resources to human resource management in general and hiring and firing in particular. By contrast, is static because it shows the labor market at a moment in time. Our understanding of the labor market—and, by extension, employment and unemployment—is badly incomplete unless we look more carefully at the movement of workers. Further, when workers and firms meet, they do not take as given a market wage but instead typically engage in some form of bargaining over the terms of employment. This vision of a dynamic labor market with bargaining is much closer to the reality of labor relations than is the model of labor supply and demand. To better understand the determinants of employment and unemployment, we therefore turn to labor market flows. We begin with some more facts, again contrasting the experience of Europe with that of the United States, and then develop a framework that allows us to think explicitly about the dynamic labor market. Facts Our starting point is the classification of individuals in the civilian working age population. Recall that economic statistics place them as one of the following: employed, unemployed, or not in the labor force. Imagine taking a snapshot of the US economy each month.

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