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Theory of Job Search. Unemployment-Participation Tradeoff and Spatial Search with Asymmetric Changes of the Wage Distribution

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Theory of Job Search. Unemployment-Participation Tradeoff and Spatial Search with Asymmetric Changes of the Wage Distribution Theory of Job Search. Unemployment-Participation Tradeoff and Spatial Search with Asymmetric Changes of the Wage Distribution Dissertation zur Erlangung des Grades eines Doktors der Wirtschaftswissenschaften eingereicht an der Wirtschaftswissenschaftlichen Fakultat¨ der Universitat¨ Regensburg vorgelegt von Alisher Aldashev Betreuer: Prof. Dr. Joachim Moller¨ Prof. Dr. Lutz Arnold Datum der Disputation 5. Juli 2007 Theory of Job Search. Unemployment-Participation Tradeoff and Spatial Search with Asymmetric Changes of the Wage Distribution Alisher Aldashev ZEW, Mannheim Mannheim, November 14, 2007 Contents 1 Introduction 1 2 Review of Literature 6 2.1 ModelswithConstantWages(UrnModels) . ..... 8 2.1.1 FullEquilibriumModelwithEmploymentAgency . ..... 8 2.1.2 Equilibrium Unemployment Rate and Employment Duration...... 11 2.1.3 SpatialSearchwithConstantWages . ... 13 2.2 ExogenousWageDispersion . .. 14 2.2.1 SingleWageOfferModel,DiscreteTime . ... 14 2.2.2 MultipleWageOfferModel,ContinuousTime . .... 16 2.3 EndogenousWageDispersion . .. 18 2.3.1 WageDispersionDuetoWorkerHeterogeneity . ..... 18 2.3.2 Equilibrium Wage Dispersion with Identical Workers . ......... 24 2.4 ConclusionandEmpiricalRelevance . ...... 26 3 Nonstationarity in the Theory of Job Search and Withdrawals from the Labor Market 28 3.1 TheoreticalFramework . .. 28 3.2 UnemploymentParticipationTradeoff . ....... 30 3.3 Simulations .................................... 32 i 4 Empirical Estimation of Duration Models 35 4.1 EstimationMethods............................... 35 4.1.1 ParametricMethods ........................... 37 4.1.2 Proportional Hazard Specification and SemiparametricEstimation . 38 4.1.3 CompetingRisks ............................. 39 4.1.4 Nonparametric Methods: Kaplan-Meier Product-Limit Estimator . 40 4.2 The Kaplan-Meier Estimator and Withdrawals from the LaborMarket . 41 5 Spatial Search Theory and Commuting 47 5.1 Introduction.................................... 47 5.2 BilocationalSearch .............................. .. 49 5.3 MaximalAcceptableTravelCost . .... 54 5.4 Participation................................... 55 6 Empirical Estimation of a Commuting Model 58 6.1 Introduction.................................... 58 6.2 DataandDescriptiveEvidence . .... 59 6.3 ClusteringandRobustVarianceEstimation . ........ 62 6.4 EstimatingthePoissonModel . ... 64 6.5 EstimatingtheNegativeBinomialModel. ....... 67 6.6 ZeroInflatedModels ............................... 69 6.7 Conclusion .................................... 78 7 Summary, Potential Drawbacks and Open Questions 79 References........................................ 83 A Formulae Derivation 90 A.1 FormulaefromSection2.1.3 . ... 90 A.2 FormulaefromSection2.2.1 . ... 90 ii A.3 FormulaefromSection2.2.2 . ... 93 A.4 FormulaefromSection2.3.2 . ... 93 A.5 FormulaefromSection3.1 . .. 95 A.6 FormulaefromSection4.1 . .. 97 A.7 FormulaefromSection5.2 . .. 97 A.8 ProofofProposition1.. .. .. .. .. .. .. .. .. 99 A.9 ProofofProposition2.. .. .. .. .. .. .. .. .. 99 A.10ProofofProposition3. 102 A.11ProofofProposition4. 103 A.12DataUsed..................................... 104 A.13 Maximal Acceptable Commuting Distance, Simulations . ............ 105 A.14 Zero-inflatednegativebinomialestimation . ........... 107 A.15DescriptiveStatistics . ..... 109 A.16WithdrawalsfromtheLaborMarket . ..... 111 A.17AlternativeSpecifications. ...... 113 A.18SoftwareUsed................................... 117 iii Preface This dissertation was written during my time as a doctorate student at the University of Regens- burg and work on the project ”Flexibilit¨at der Lohnstruktur, Ungleichheit und Besch¨aftigung - Eine vergleichende Mikrodatenuntersuchung f¨ur die USA und Deutschland” (under supervision of Prof. Dr. M¨oller), which is part of a greater project of the DFG ”Flexibilisierungspotenziale bei heterogenen Arbeitsm¨arkten”. I wish to thank Prof. Dr. Joachim M¨oller and Prof. Dr. Lutz Arnold for their supervision and valuable comments and suggestions, which in my view helped to improve my thesis and added much to its scientific value. I benefited greatly from the discussions at the econometrics semi- nar and lunch seminar held at the University of Regensburg, especially with Dr. J¨org Lingens, Prof. Dr. emer. Walter Oberhofer, Prof. Dr. Rolf Tschernig (all University of Regensburg), Dr. Johannes Ludsteck (IAB), Dr. Thomas Schreck (BulwienGesa AG, M¨unchen-Berlin). I also wish to thank Prof. Bernd Fitzenberger, PhD (University of Freiburg) for his thorough com- ments on one of my papers, which contributed much to this dissertation. I also enjoyed valuable discussions with Prof. Dr. Wolfgang Franz, Melanie Arntz, Alfred Garloff (all ZEW), Dr. Ralf Wilke (University of Leicester), Prof. Michael Burda, PhD (Humboldt University, Berlin). I also wish to thank my new colleagues at ZEW for their help: Dr. Stephan Lothar Thomsen (for his LaTeX expertise), Markus Clauss, Christian G¨obel (for his tip on using Gnumeric). Of course, this work would have never been possible without constant care and support of my family: my parents and grandparents, my sister Aisulu. And last, but certainly not least, I am indebted much to my dearest wife – Olga, not only for her help with the LaTeX formula editor, but most importantly for her love and understanding during all these years. iv Chapter 1 Introduction Information economics has already had a profound effect on how we think about economic policy, and are likely to have an even greater influence in the future. The world is, of course, more complicated than our simple - or even our more complicated models - would suggest. J. Stiglitz, Nobel Prize lecture, December 8, 2001 Job search theory is a relatively young actor on the stage of economics and is an integral part of a broader field of economics of information. The ideas about functioning of the markets where information is costly to obtain were first enunciated by the Nobel Prize winner G. Stigler in his pioneering work ”The Economics of Information” published in the Journal of Political Economy in 1961. To explicate the very essence of what the economics of information and job search in particular all about I refer to Stigler himself: I propose on this occasion to address the same kinds of questions to an entirely different market: the market for new ideas in economic science. Most economists enter this market in new ideas, let me emphasize, in order to obtain ideas and meth- ods for the applications they are making of economics to the thousand problems with which they are occupied: these economists are not the suppliers of new ideas but only demanders. Their problem is comparable to that of the automobile buyer: to find a reliable vehicle. Indeed, they usually end up by buying a used, and there- fore tested, idea. Those economists who seek to engage in research on the new ideas of the science - to refute or confirm or develop or displace them - are in a sense both buyers and sellers of new ideas. They seek to develop new ideas and 1 persuade the science to accept them, but they also are following clues and promises and explorations in the current or preceding ideas of the science. It is very costly to enter this market: it takes a good deal of time and thought to explore a new idea far enough to discover its promise or its lack of promise. The history of economics, and I assume of every science, is strewn with costly errors: of ideas, so to speak, that wouldn’t run far or carry many passengers. How have economists dealt with this problem? That is my subject. (G. Stigler, Nobel Memorial Lecture, December 8, 1982) The first application of the economics of information, in particular the notion that information is costly to obtain and returns in the future are uncertain, to the labor market appeared in Stigler’s 1962 work. Since McCall (1970) seminal article the job search theory has become a standard tool for analyzing the decision making process of an unemployed individual who is looking for work. An important contribution of the job search theory is an interpretation of unemployment on a microeconomic level. As Mortensen puts it: The theory of job search has developed as a complement to the older theoretical framework. Many writers found that the classic labor supply model with its em- phasis on unilateral and fully informed choice could not explain important features of the typical individual’s experience in the labor market. The experience of unem- ployment is an important example. Within the income-leisure choice framework, unemployment simply has no interpretation as a consequence of the assumptions that jobs are instantaneously available at market clearing wage rates known to the worker. (Mortensen (1986, p.850)) The original contribution of the search theory was the theoretic approach to the analysis of un- employment spell durations. In a partial equilibrium model (wages set by firms are considered exogenous), which stems from developments in the theory of sequential statistical decision the- ory, a worker is looking for a job in a decentralized labor market. Information on vacancies and the pay is imperfect and must be acquired before a worker becomes employed. Viewing this process as costly and sequential enables us to analyze variation in the unemployment spells that workers experience and in the wages received once employed. The length of time a worker spends looking for a job and the subsequent wage received once employed are both random variables with distributions which depend on the worker’s individual characteristics as well
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