Estimating Duration Dependence in Job Search: the Within-Estimation Duration Bias

Abstract: Many recent studies use individual longitudinal data to analyze job search behaviors. Such data allow the use of fixed-effects models, which supposedly address the issue of dynamic selection and make it possible to identify the structural effect of time. However, using fixed effects can induce a sizable within-estimation bias if job search outcomes take specific values at the time job seekers exit unemployment. This pattern creates an undesirable mechanical correlation between the error term and the time regressor. This paper derives the conditions under which the fixed-effects estimator provides valid estimates of structural duration-dependence relationships. Using Monte Carlo simulations, we show that the magnitude of the bias can be extremely large. Our results are not limited to the job search context but naturally extend to any framework in which longitudinal data are used to measure the structural effect of time.