A Directed Search Model of Ranking by Unemployment Duration

Edgar Preugschat and Javier Fernandez ()
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Edgar Preugschat: Norwegian School of Management

No 441, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: Empirical evidence shows that longer spells of unemployment are associated with fewer job offer arrivals, lower job-finding rates and wage offers. Further, workers with longer unemployment duration are discriminated against. This paper sets up a directed search model based on informational stigma to replicate these facts. Firms imperfectly test for the applicantsâ productivity. Unemployment duration is informative about the applicantsâ expected productivity: if skilled workers perform better at the recruiting processes, then longer unemployment durations signal lower expected productivity. As a result, candidates with shorter unemployment spells are ranked ahead. The intertemporal link leads to constrained inefficiency and makes information sensitive to business cycle fluctuations. Consistent with the empirical evidence from CPS, simulated wages decline faster during economic boom periods.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:441

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