Job Seekers’ Perceptions and Employment Prospects: Heterogeneity, Duration Dependence, and Bias

This paper uses job seekers’ elicited beliefs about finding to disentangle the sources of decline in job-finding rates by duration unemployment. We document that have strong predictive power for finding, but are not revised downward when remaining unemployed and subject optimistic bias, especially long-term unemployed. Leveraging beliefs, we find substantial heterogeneity with resulting dynamic selection explaining most observed negative dependence finding. Moreover, underreact distorting search behavior increasing (JEL D83, E24, J22, J64, J65)