Understanding Expectations in Job Search: Subjective Duration Dependence, Aggregate Labor Market Shocks and Overreaction

Unemployed job seekers might worry about their chances of finding a job, especially when they remain unemployed for longer or labor market conditions turn out different than expected. Based on multiple survey samples, we find that job seekers anticipate a significant decline in their job-finding probability with an additional month of unemployment. However, they adjust their job-finding probabilities upward (downward) when the aggregate unemployment rate is unexpectedly low (high). Evaluated with a quantitative job search model, subjective job-finding probabilities substantially overreact to aggregate labor market conditions - consistent with Diagnostic Expectations. These beliefs have the potential to offset a substantial part of the negative consequences of moral hazard in job search