Decomposing Duration Dependence in the Job Finding Rate in a Stopping Time Model

We develop a simple dynamic model of a worker’s transitions between employment and nonemployment. 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 nonemployment 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 nonemployment spells for each worker. Moreover, we can nonparametrically identify the distribution of a subset of our model’s parameters using data on the duration of repeated nonemployment spells. 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, while a mixed proportional hazard model with arbitrary heterogeneity and an arbitrary baseline hazard rate is rejected using the same data set. Our preliminary parameter estimates indicate that dynamic selection is important for the decline in the job finding rate at short durations, while structural duration dependence drives most of the decline in the job finding rate at long durations.