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Modelling The Probability Of Leaving Unemployment: Competing Risks Models With Flexible Baseline Hazards

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  • NARENDRANATHAN, W.
  • STEWART, M.B.

Abstract

Unemployment durations are generally modelled by specifying the conditional probability of leaving unemployment (the hazard function). Existing studies for Britain all use very restrictive parametric specifications of the hazard function, mostly commonly Weibull in form. These restrictions potentially bias the estimated effects, particuarly those of the time-varying economic variables and the baseline hazard. This paper investigates models for the probability of leaving unemployment with these restrictions removed. We use semi-parametric methods to estimate models with completely unrestricted baseline hazards and a model involving flexible step-function approximations to the baseline hazard. The Weibull is found not to give a satisfactory representation of the baseline hazard and its use is found to distort the pattern of unemployment income effects over the length of the spell. The existing studies for Britain is also model the exit probability from unemployment rather than the probability of entering a job, despite generally interpreting the evidence as being about the latter probability. We use a competing risks model to distinguish exit into employment from exit into alternative states. We find that the single risk model of exit understates the effects of income in and out of work on the probability of entering a job.

Suggested Citation

  • Narendranathan, W. & Stewart, M.B., 1989. "Modelling The Probability Of Leaving Unemployment: Competing Risks Models With Flexible Baseline Hazards," The Warwick Economics Research Paper Series (TWERPS) 331, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:331
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    File URL: https://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/1989-1994/twerp331.pdf
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    References listed on IDEAS

    as
    1. Meyer, Bruce D, 1990. "Unemployment Insurance and Unemployment Spells," Econometrica, Econometric Society, vol. 58(4), pages 757-782, July.
    2. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-679, June.
    3. Ham, John C & Rea, Samuel A, Jr, 1987. "Unemployment Insurance and Male Unemployment Duration in Canada," Journal of Labor Economics, University of Chicago Press, vol. 5(3), pages 325-353, July.
    4. Harrison, Alan & Stewart, Mark, 1989. "Cyclical Fluctuations in Strike Durations," American Economic Review, American Economic Association, vol. 79(4), pages 827-841, September.
    5. Atkinson, A. B. & Gomulka, J. & Micklewright, J. & Rau, N., 1984. "Unemployment benefit, duration and incentives in Britain : How robust is the evidence?," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 3-26.
    6. Lancaster, Tony, 1985. "Generalised residuals and heterogeneous duration models : With applications to the Weilbull model," Journal of Econometrics, Elsevier, vol. 28(1), pages 155-169, April.
    7. Heckman, James J. & Singer, Burton, 1984. "Econometric duration analysis," Journal of Econometrics, Elsevier, vol. 24(1-2), pages 63-132.
    8. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, vol. 28(1), pages 85-101, April.
    9. Nickell, Stephen J, 1979. "Estimating the Probability of Leaving Unemployment," Econometrica, Econometric Society, vol. 47(5), pages 1249-1266, September.
    10. Lawrence F. Katz & Bruce D. Meyer, 1990. "Unemployment Insurance, Recall Expectations, and Unemployment Outcomes," The Quarterly Journal of Economics, Oxford University Press, vol. 105(4), pages 973-1002.
    11. Lancaster, Tony, 1979. "Econometric Methods for the Duration of Unemployment," Econometrica, Econometric Society, vol. 47(4), pages 939-956, July.
    12. Jerry Hausman & Aaron Han, 1986. "Semiparametric Estimation of Duration and Competing Risk Models," Working papers 450, Massachusetts Institute of Technology (MIT), Department of Economics.
    13. Narendranathan, W & Nickell, S & Stern, J, 1985. "Unemployment Benefits Revisited," Economic Journal, Royal Economic Society, vol. 95(378), pages 307-329, June.
    14. Chris Elbers & Geert Ridder, 1982. "True and Spurious Duration Dependence: The Identifiability of the Proportional Hazard Model," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 403-409.
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    Keywords

    unemployment ; risk ; duration ; evaluation;

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