Unobserved Heterogeneity and Skill Loss in a Structural Model of Duration Dependence

Ioannis Kospentaris

Review of Economic Dynamics, 2021, vol. 39, 280-303

Abstract: In this paper, I use an equilibrium search model of the labor market to quantify the importance of two classic explanations for why the job-finding rate strongly falls with unemployment duration: (i) unobserved worker heterogeneity and (ii) loss of skills. In the model, unobserved heterogeneity has a large impact on job-finding rates but not on reemployment wages. Wages depend almost exclusively on workers' skill levels. I use the available causal estimates of the effects of unemployment duration on callback rates and reemployment wages to calibrate the model parameters for unobserved heterogeneity and skill loss. Quantitative analysis of the model reveals that unobserved heterogeneity accounts for a little more than two thirds of total duration dependence in unemployment, while skill loss for the remaining part. Next, the effects of training and subsidized employment programs on duration dependence are examined through the lens of the model. Subsidized employment raises job-finding rates for all workers but helps short-term more than long-term unemployed workers. Training raises the job-finding rates of the long-term unemployed but lowers job-finding rates for workers with short unemployment spells. The interaction of unobserved heterogeneity with skill loss due to endogenous vacancy creation is crucial for these results. (Copyright: Elsevier)

Keywords: Unemployment Duration; Unobserved Heterogeneity; Skill Loss; Labor Market Policy; Search and matching (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://dx.doi.org/10.1016/j.red.2020.07.008
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See https://www.sciencedirect.com/ for details.

Related works:
Software Item: Code and data files for "Unobserved Heterogeneity and Skill Loss in a Structural Model of Duration Dependence" (2020)
Working Paper: Online Appendix to "Unobserved Heterogeneity and Skill Loss in a Structural Model of Duration Dependence" (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:issued:19-483

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/j.red.2020.07.008

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().