Labor Market Flaws and Stocks over the Business Cycle: The Role of the Participation Margin

We investigate the cyclical properties of labor market flows in the Czech Republic and Poland using impulse responses from a VAR model with three net flows and an output gap. We apply the stock-flow framework to derive impulse responses of employment, unemployment and participation rates, and their decomposition into the contributions of net flows. We find that the role of flows from and into inactivity in explaining the cyclical properties of unemployment and employment rates is small, but is not negligible. The participation rate is driven by the countercyclical net flow from inactivity to unemployment.