DP5108 A Structural Non-Stationary Model of Job Search: Stigmatization of the Unemployed by Job Offers or Wage Offers?

Author(s): Stefan Lollivier, Laurence Rioux
Publication Date: June 2005
Keyword(s): insurance, job search, reservation wages, unemployment duration
JEL(s): J64, J65
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5108

We develop a structural non-stationary model of job search in the fashion of van den Berg (1990). Non-stationarity comes from the duration-dependence in benefits, in the arrival rate of job offers, and in wage offers. The model is then estimated using the French sample of the ECHP Survey (1994-2000). This data set provides the variables required to identify the model (reservation wages, job offers arrival rate, accepted wages and rejected wages) and allows us to reconstruct the ‘true’ monthly sequence of benefits for each unemployed worker. We find that duration-dependence in job offers is quite limited: the arrival rate of job offers is exactly the same after two years of unemployment than at the beginning of the spell. Duration dependence in wage offers is slightly more pronounced: wages are decreasing during the first two years of unemployment. Nevertheless the most important fall is observed at the beginning of the spell. We also find that the former employed in temporary jobs are more sensitive to duration than the other unemployed. Then we simulate the effects, on the expected duration of unemployment, of different reforms of the unemployment compensation system. The expected duration of unemployment goes from 14.01 months to 14.35 months (i.e. +2.42%) when the level of UI benefit is raised by 14% (reform A). Replacing a declining time sequence by a flat profile (reform B) lengthens the spell of unemployment by 1.39 months (+9.92%). The impact is dramatic on the subset of former high-wage workers, whose unemployment duration is raised by 3.92 months (+24.48%). Compared with reform B, the imposition of sanctions shortens substantially unemployment duration, which goes from 15.4 months to 13.15 months (-14.61%). Once more, the effect is stronger on the subset of former high-wage workers, whose unemployment duration is decreased by 6.15 months (-30.85%). Finally, a 3-month increase in the maximum duration of UI entitlement has a quite limited impact on unemployment duration.