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A Search Model of Discouragement

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  • Rosholm, Michael

    ()
    (Aarhus University)

  • Toomet, Ott

    ()
    (University of Tartu)

Abstract

Discouragement is a process occurring during an unemployment spell. As the spell prolongs, an individual gradually realises that the returns to search can no longer outweigh search costs, and hence she may eventually leave the labour force. This is analysed theoretically in a framework of unemployed search. We construct a search model, which is stationary from the point of view of the individual, but which has nonstationary features. Namely, the unemployed worker is occasionally hit by shocks leading to a decline in job offer arrival rates. These shocks can be due to stigmatisation or to psychological consequences of unemployement affecting search effectiveness. This model enables us to analyse the issue of discouragement, as the returns to search will gradually decline. Even so, the model is actually stationary from the point of view of the individual, which implies that many interesting theoretical results may be derived. Moreover, from the point of view of the researcher, the model exhibits negative duration dependence in the hazard rate into employment and positive duration dependence in the hazard rate into non-participation, features which correspond well to real data. We use the model to analyse theoretically the impact of changes in unemployment insurance and social assistance benefits, and we conduct some simulation exercises based on a calibrated model.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1633.

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Length: 31 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:iza:izadps:dp1633

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Keywords: discouragement; search theory; labour supply;

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References

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  1. Frijters, Paul & van der Klaauw, Bas, 2003. "Job Search with Nonparticipation," CEPR Discussion Papers 3922, C.E.P.R. Discussion Papers.
  2. Bruce D. Meyer, 1988. "Unemployment Insurance And Unemployment Spells," NBER Working Papers 2546, National Bureau of Economic Research, Inc.
  3. Fredriksson, P. & Holmlund, B., 1998. "Optimal Unemployment Insurance in Search Equilibrium," Papers 1998-2, Uppsala - Working Paper Series.
  4. Addison, John T. & Portugal, Pedro, 2001. "Unemployment Duration: Competing and Defective Risks," IZA Discussion Papers 350, Institute for the Study of Labor (IZA).
  5. Micklewright, John & Nagy, Gyula, 1999. "Living standards and incentives in transition: the implications of UI exhaustion in Hungary," Journal of Public Economics, Elsevier, vol. 73(3), pages 297-319, September.
  6. An, M.Y., 1996. "Log-Concave Probability Distributions : Theory and Statistical Testing," Papers 96-01, Centre for Labour Market and Social Research, Danmark-.
  7. Theodossiou, I., 1998. "The effects of low-pay and unemployment on psychological well-being: A logistic regression approach," Journal of Health Economics, Elsevier, vol. 17(1), pages 85-104, January.
  8. Goldsmith, Arthur H. & Veum, Jonathan R. & Darity, William Jr., 1995. "Are being unemployed and being out of the labor force distinct states?: A psychological approach," Journal of Economic Psychology, Elsevier, vol. 16(2), pages 275-295, July.
  9. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
  10. Burdett, Kenneth, et al, 1984. "Earnings, Unemployment, and the Allocation of Time over Time," Review of Economic Studies, Wiley Blackwell, vol. 51(4), pages 559-78, October.
  11. Winkelmann, Liliana & Winkelmann, Rainer, 1998. "Why Are the Unemployed So Unhappy? Evidence from Panel Data," Economica, London School of Economics and Political Science, vol. 65(257), pages 1-15, February.
  12. Arellano, Manuel & Bentolila, Samuel & Bover, Olympia, 1998. "Unemployment Duration, Benefit Duration and the Business Cycle," CEPR Discussion Papers 1840, C.E.P.R. Discussion Papers.
  13. van den Berg, Gerard J, 1990. "Search Behaviour, Transitions to Nonparticipation and the Duration of Unemployment," Economic Journal, Royal Economic Society, vol. 100(402), pages 842-65, September.
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Cited by:
  1. Jesper Bagger & Morten Henningsen, 2008. "Job Durations and the Job Search Model: A Two-Country, Multi-Sample Analysis," Discussion Papers 553, Research Department of Statistics Norway.
  2. Rosholm, Michael & Vejlin, Rune Majlund, 2007. "Reducing Income Transfers to Refugee Immigrants: Does Starthelp Help You Start?," IZA Discussion Papers 2720, Institute for the Study of Labor (IZA).
  3. Contini, Dalit & Richiardi, Matteo G., 2012. "Reconsidering the effect of welfare stigma on unemployment," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 229-244.
  4. Falk, Armin & Huffman, David B. & Sunde, Uwe, 2006. "Do I Have What It Takes? Equilibrium Search with Type Uncertainty and Non-Participation," IZA Discussion Papers 2531, Institute for the Study of Labor (IZA).
  5. Ott-Siim Toomet, 2005. "Does an Increase in Unemployment Income Lead to Longer Unemployment Spells? Evidence Using Danish Unemployment Assistance Data," Bank of Estonia Working Papers 2005-09, Bank of Estonia, revised 10 Oct 2005.

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