Unemployment Duration, Job Search and Labour Market Segmentation Evidence from Urban Ethiopia

Abstract

Although it is a common theoretical assumption that the chances to find a job fall with time in unemployment, this is not systematically confirmed by empirical evidence, and there is no evidence for developing countries. Using a standard job search model we test the two main explanations why we may observe non-negative duration dependence while genuine duration dependence is negative, namely financial support for the unemployed and a change in the economy over time. We also identify a third explanation which may be relevant especially for developing countries, namely that the labour market is segmented, and extend the classic job search model. Using data for urban Ethiopia we first show that the observed hazard does not fall with time in unemployment for the majority of spells after controlling for unobserved heterogeneity. Using the tests developed from the model we can reject the classic explanations and find supportive evidence that labour market segmentation explains observed non-negative duration dependence, as searching for bad job lifts the hazard over time. Our findings underline the potential importance of labour market segmentation, especially in developing countries, and in particular in the presence of a large public sector