Job search with nonparticipation

In a non-stationary job search model we allow unemployed workers to have a permanent option to leave the labor force. Transitions into non-participation occur when reservation wages drop below the utility of being nonparticipant. Taking account of these transitions allows the identification of the duration dependence in the job offer arrival rate and the wage offer distribution. We estimate the structural model with individual data from the German Socio-Economic Panel and use simulated maximum likelihood. The results show that negative duration dependence in the wage offer distribution is the main cause of the decreasing reservation wage. Also the rate at which job offers arrive decreases, especially at the beginning of the unemployment spell, but its impact on the reservation wage is modest. These findings provide micro evidence for the loss of skills assumption of Ljungqvist and Sargent (1998).