The job search intensity supply curve how labor market conditions affect job search effort

During the Great Recession of 2007, unemployment reached nearly 10 percent in the United States and the ratio of unemployment to open positions more than tripled.  The weak labor market prompted an unprecedented extension in the length of time in which a claimant could collect unemployment insurance (UI) in the U.S. to 99 weeks.  While many claim that extending UI during a recession will reduce search intensity, the effect of weak labor market conditions on search remains a mystery.  As a result, policymakers are in the dark as to whether UI extensions reduce already low search effort during recessions or perhaps decrease excessive search, which causes congestion in the labor market.  At the same time, modelers of the labor market have little empirical justification for their assumptions on how search intensity changes over the business cycle.    The goal of this paper is to inform both policymakers and economists as to whether job search intensity rises or falls with macro labor market conditions.

To establish the relationship between an individual’s job search effort and the condition of the labor market, this paper develops, and empirically estimates, a search model that allows for endogenous job search effort and wealth.  In this model the relationship between macro labor market conditions and a worker's search effort depends on whether these two factors are substitutes or complements in the job search process.    If they are perfect substitutes, job search effort can be substituted for poor labor market conditions when attempting to find work, and they would move in opposite directions.  However, if they are perfect complements, poor labor market conditions decrease the effectiveness of one’s search efforts and it would be optimal for the unemployed to reduce their search intensity.  For scenarios in between perfect complements and substitutes, it is possible for search effort to be either positively or negatively related to the health of the macro economy depending on the initial condition of the labor market. 

To determine whether search effort and labor market conditions are indeed positively or negatively related, I estimate the parameters of the structural model using a sample of unemployment spells from the National Longitudinal Survey of Youth 1997.  The results indicate that macro labor market conditions and individual search effort are strong complements and move together over the business cycle.  Further, the estimation also reveals that more risk-averse and less wealthy individuals exhibit less search effort.