Duration Dependence, Endogenous Search and Structural Analysis of Labor Market Histories

This paper studies a structural model of labor market history in an environment with duration dependence. We treat the agent's job search effort explicitly as part of the dynamic decision along with a binary employment choice. The optimal policy is shown to exist and to be of the stationary reservation-wage type. Based on the characterization of the optimal policy, we then show: (1) the value function exhibits inverse-L shaped indifference curves and hence is neither differentiable nor concave, (2) the optimal search effort is decreasing in the realized unmeasured utility shocks, and (3) the labor market history is semi-Markovian, These implications lead naturally to an estimable structural model of labor market histories.