Job Seekers' Perceptions and Employment Prospects: Heterogeneity, Duration Dependence and Bias

This paper analyses job seekers' perceptions and their relationship to unemployment outcomes to study heterogeneity and duration dependence in both perceived and actual job finding. Using longitudinal data from two comprehensive surveys, we document that elicited beliefs are (1) strongly predictive of actual job finding, (2) subject to an optimistic bias that is larger for the long-term unemployed, and (3) not revised downward when job seekers remain unemployed. We exploit the joint observation of beliefs and ex-post realizations, to disentangle heterogeneity and duration dependence in true job finding rates. To this purpose, we estimate non-parametric bounds as well as a reduced-form statistical framework that allows for elicitation errors and systematic biases in beliefs. We find a substantial amount of heterogeneity in true job finding rates, accounting for most of the observed decline in job finding rates over the spell of unemployment. We also find that job seekers' beliefs systematically under-react to these differences in job finding rates. We show theoretically and quantify in a calibrated model of job search how these biased beliefs contribute to the slow exit out of unemployment and can explain more than 10 percent of the incidence of long-term unemployment.