The Probability of Finding a Job

Recent research has reaffirmed that the prob? ability of an unemployed worker finding a job varies substantially over the business cycle. Robert E. Hall (2005, 101) concludes from his examination of a variety of data sources that "Unemployment is high in a recession because jobs are hard to find, not because more job-seek? ers have been dumped into the labor market by elevated separation rates." Shimer (2007) shows that movements in the job finding probability account for three-quarters of the fluctuations in the unemployment rate in the United States during the postwar period, while movements in the exit rate from employment to unemployment account for the other quarter. Michael W. Elsby, Ryan Michaels, and Gary Solon (2007) argue that movements in the job finding probability accounted for about 65 percent of unemploy? ment fluctuations prior to the last two reces? sions, and more in 1990-1991 and 2001. Shigeru Fujita and Gary Ramey (2007) claim a more substantial role for the exit rate to unemploy? ment but still find that the job finding probabil? ity accounts for at least half of the fluctuations in unemployment. While it is theoretically convenient to discuss a single job finding probability for all workers, economists have long recognized that the job finding probability falls with unemployment duration (Hyman B. Kaitz 1970). This paper reexamines duration dependence and the cycli? cally of duration dependence in the job finding probability, both empirically and theoretically. To start, I develop a simple model with a single parameter that determines both how the job finding probability varies with unemployment duration and how it varies with aggregate eco? nomic conditions. The model's main departure from most existing research is to think of unemployed workers as waiting for labor mar? ket conditions to improve, rather than searching for job opportunities (Boyan Jovanovic 1987; Fernando Alvarez and Shimer 2007). They continuously compare their lifetime utility in the best available job with their lifetime utility if they remain unemployed. Individual / works if this difference, 8?(t), is positive at time t and not if it is negative. If S? is persistent, this leads to duration dependence in the hazard rate of exiting unemployment, since a newly unem? ployed worker is more likely to be near the threshold for taking a job than someone who is long term unemployed. The extent of dura? tion dependence is governed by the stochastic process for S?, which also determines how the average job finding probability varies with eco? nomic conditions.