An Analysis of the Processes of Labor Market Exclusion and (Re-)Inclusion

Abstract

In this paper we analyze the processes of labor market exclusion and (re-)inclusion, using a Danish register-based data set covering the period 1981-1990. The analysis is performed by estimation of reduced form transition models, the parameters of which are interpreted within the framework of search theory mixed with social psychological theories regarding unemployment and labor market exclusion. The main findings of the study are that low levels of education and working experience are associated with an increased risk of labor market exclusion. However, for the labor market (re-)inclusion process, human capital variables are not important. There is indirect evidence of psychological damaging and/or stigma effects of unemployment and nonparticipation. There is also evidence of budget constraints that eventually lead to decreasing reservation wages or increasing search intensity, as unemployment spells become very long. We discuss some policy implications of our findings.

Keywords: Labor Market Exclusion and Inclusion, Multiple State Duration Model, Left-Censoring, Unobserved Heterogeneity

JEL Classification: C41, J21, J60, J64