Labour market participation and frictional unemployment in stochastic equilibria

This thesis explores the role of inactivity in shaping unemployment fluctuations in frictional labour markets. In the First Chapter, I document several facts on the behaviour of inactive individuals in the United Kingdom using the Labour Force Survey, observing a high degree of heterogeneity within those that are not classified as being part of the labour force population. I analyse the behaviour of marginally attached individuals and those who do not desire to work and their role in explaining labour market fluctuations. Then, I use the results found in the First Chapter as a motivation for the rest of this thesis. In the Second Chapter, I consider a search and matching model where vacancies behave as a stock variable in the spirit of Coles and Moghaddasi (2017). Here, I include an exogenous partic- ipation margin and assume marginally attached search with a non-zero job finding probability. I calibrate and evaluate the performance of the model in generating the behaviour of unemployment and vacancies observed in the data for the UK. Finally, the Third Chapter introduces an endogenous participation decision: in every period non-employed individuals decide whether to look for a job or to be inactive according to the state of the economy. I numerically test how modelling the search choice affects the behaviour of individuals when the economy is hit by productivity and separation shocks.