Decomposing Duration Dependence in a Stopping Time Model

We develop a simple dynamic model of a worker’s transitions between employment and non-employment. Our model implies that a worker finds a job at an optimal stopping time, when a Brownian motion with drift hits a barrier. The model has structural duration dependence in the job finding rate, in the sense that the hazard rate of finding a job changes during a non-employment spell for a given worker. In addition, we allow for arbitrary parameter heterogeneity across workers, so dynamic selection also affects the average job finding rate at different durations. We show that our model has testable implications if we observe at least two completed non-employment spells for each worker. Moreover, we can identify the distribution of a subset of our model’s parameters using data on the duration of repeated non-employment spells and use the estimated parameters to understand the determinants of duration dependence. We use a large panel of social security data for Austrian workers to test and estimate the model. Our model is not rejected by the data. Our parameter estimates indicate that dynamic selection is critical for understanding the evolution of the aggregate job finding rate. Preliminary and Incomplete