Decomposing Duration Dependence in a Stopping Time Model

Abstract

We develop a dynamic model of transitions in and out of employment. A worker finds a job at an optimal stopping time, when a Brownian motion with drift hits a barrier. This implies that the duration of each worker's jobless spells has an inverse Gaussian distribution. We allow for arbitrary heterogeneity across workers in the parameters of this distribution and prove that the distribution of these parameters is identified from the duration of two spells. We use social security data for Austrian workers to estimate the model. We conclude that dynamic selection is a critical source of duration dependence.