Job seekers’ perceptions and employment prospects: heterogeneity, duration dependence, and bias

This paper uses job seekers’elicited beliefs about job finding to disentangle the sources of the decline in job-finding rates by duration of unemployment. We document that beliefs have strong predictive power for job finding, but are not revised downward when remaining unemployed and are subject to optimistic bias, especially for the long-term unemployed. Leveraging the predictive power of beliefs, we find substantial heterogeneity in job finding with the resulting dynamic selection explaining most of the observed negative duration dependence in job finding. Moreover, job seekers’beliefs underreact to heterogeneity in job finding, distorting search behavior and increasing long-term unemployment.