Title page

Contents

Abstract 3

1. Introduction 4

2. Data, measurement and empirical findings 9

2.1. Data sources 9

2.2. Measurement framework 9

2.3. A first look at the data 10

2.4. Empirical findings 10

3. The model 16

3.1. Economic environment 16

3.2. Bellman equations 20

3.3. Policy functions 24

3.4. Free entry and equilibrium 25

4. Calibration and model fit 26

4.1. Calibration 26

4.2. Model fit 30

5. Quantitative analysis 34

5.1. Key mechanisms 35

5.2. Sources of cross-country employment differences 37

6. Conclusion 43

References 43

Appendix: For Online Publication 47

A. Data Appendix 47

B. Model Appendix 60

C. Additional model results 68

Table 1. Decomposition of aggregate employment differences based on equation (3) 12

Table 2. Decomposition measuring the role of each transition probability 15

Table 3. States, decisions and value functions 20

Table 4. Common preset parameter values 28

Table 5. Country-specific parameter values 29

Table 6. Model fit to targeted moments 31

Table 7. Sources of cross-country employment differences (percentage points) 39

Table 8. Decomposition of employment elasticities (aggregate and by demographic groups) 42

Figure 1. Cross-country standard deviation of employment and labor force participation 5

Figure 2. Transition probabilities in and out of employment 11

Figure 3. Decomposition measuring the role of each transition probability 14

Figure 4. Model fit to transition probabilities across country/gender/age cells 32

Figure 5. Model fit to the age profile of transition probabilities: Average of the 'big five' 33

Figure 6. Model fit to the age profile of employment rates: All workers 34

Figure 7. Employment variance decomposition: Model vs. data 35

Figure 8. Model mechanisms driving the age profile of worker flows 36

Table A1. Description of data sources 48

Table A2a. Average transition probabilities: Men 54

Table A2b. Average transition probabilities: Women 55

Table A3a. Decomposing the employment gap: Men 57

Table A3b. Decomposing the employment gap: Women 58

Figure A1. Actual and Markov-implied employment rates 51

Figure A2. Transition rates from EU-SILC compared with LFS 52

Figure A3. Decomposition measuring the role of each transition probability in the 'big five' 59

Figure C1. Model fit to transition probabilities: France 68

Figure C2. Model fit to transition probabilities: Germany 69

Figure C3. Model fit to transition probabilities: Italy 70

Figure C4. Model fit to transition probabilities: Spain 71

Figure C5. Model fit to transition probabilities: The U.K. 72

Figure C6. Model fit to age profile of participation rates: All workers 73

Figure C7. Model fit to age profile of unemployment rates: All workers 73