IZA Discussion Paper No. 332 - IZA - Institute of Labor Economics

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DISCUSSION PAPER SERIES

IZA DP No. 332

An Analysis of the Processes of Labour Market Exclusion and (Re-) Inclusion Michael Rosholm

July 2001

Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor

An Analysis of the Processes of Labour Market Exclusion and (Re-) Inclusion

Michael Rosholm Department of Economics, University of Aarhus and IZA, Bonn

Discussion Paper No. 332 July 2001 IZA P.O. Box 7240 D-53072 Bonn Germany Tel.: +49-228-3894-0 Fax: +49-228-3894-210 Email: [email protected] This paper can be downloaded without charge at: http://papers.ssrn.com/abstract=xxxxxx An index to IZA Discussion Papers is located at: http://www.iza.org/publications/dps/

This Discussion Paper is issued within the framework of IZA’s research area The Welfare State and Labor Markets. Any opinions expressed here are those of the author(s) and not those of the institute. Research disseminated by IZA may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent, nonprofit limited liability company (Gesellschaft mit beschränkter Haftung) supported by the Deutsche Post AG. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. The current research program deals with (1) mobility and flexibility of labor markets, (2) internationalization of labor markets and European integration, (3) the welfare state and labor markets, (4) labor markets in transition, (5) the future of work, (6) project evaluation and (7) general labor economics. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character.

IZA Discussion Paper No. 332 July 2001

ABSTRACT An Analysis of the Processes of Labour Market Exclusion and (Re-) Inclusion∗ In this paper we analyze the processes of labour market exclusion and (re-) inclusion, using a Danish register-based data set covering the period 1981-1990. The analysis is performed by estimation of reduced form transition models, the parameters of which are interpreted within the framework of search theory mixed with social psychological theories regarding unemployment and labour market exclusion. The main findings of the study are that low levels of education and working experience are associated with an increased risk of labour market exclusion. However, for the labour market (re-) inclusion process, human capital variables are not important. There is indirect evidence of psychological damaging and/or stigma effects of unemployment and nonparticipation. There is also evidence of budget constraints that eventually lead to decreasing reservation wages or increasing search intensity, as unemployment spells become very long. We discuss some policy implications of our findings.

JEL Classification: Keywords:

C41, J21, J60, J64

Labour market exclusion and inclusion, multiple state duration model, leftcensoring, unobserved heterogeneity

Michael Rosholm Dept. of Economics University of Aarhus Building 350 DK-8000 Aarhus C Denmark Tel.: +45 89 42 15 59 Fax: +45 86 13 63 34 Email: [email protected]

* Acknowledgement: Financial support from the Danish National Research Foundation is gratefully acknowledged. I would like to thank Peter Jensen, Nick Kiefer, Michael Svarer, and Geert Ridder for valuable comments. Remaining errors are my own.

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