On the Effects of Ranking by Unemployment Duration

Abstract

We propose a theory based on the firm's hiring behavior that rationalizes the observed decline of callback rates for an interview, exit rates, and reemployment wages over unemployment duration. We build a directed search model with symmetric incomplete information on worker types and non-sequential search by firms. Sorting due to firms' screening of applicants in the past makes expected productivity fall with unemployment duration, which induces firms to rank applicants by duration. The labor market is non-segmented in equilibrium because firms find it optimal to attract all workers, which ensures that callback and exit rates both fall with duration. Furthermore, we conduct a numerical exercise to show that our model can replicate quite well the observed falling patterns, and that the effects of the firm's ranking decision can be sizable.