Locus of Control in the Labor Market: How Subjective Perceptions Affect the Unemployment Rate

Details

Supervisors

Van Der Linden, Bruno ; Hungerbuhler, Mathias ; Le Barbanchon, Thomas

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale

Abstract

This paper introduces the psychological concept of Locus of Control into the model developed by Pissarides (2000). It does so by recognizing an explicit relationship between the effort exerted by an individual who is looking for a job and the extent to which he or she believes to have control over daily occurrences. This framework implies that individuals with an internal locus of control are more inclined to put higher effort in the search process, which increases their opportunities to exit unemployment compared to their external counterparts, who believe their actions have little effects on life outcomes. Inspired by the job search model of Caliendo et al. (2015b), we provide a theoretical model in a dynamic general equilibrium setting, where both sides of the market interact. However, while the effort provided is higher, we also predict that an increase in the subjective beliefs about the impact of one’s search will result in a slacker labor market, which decreases the exit rate out of unemployment. The resulting effect on the unemployment level is theoretically ambiguous, but is found to be overall positive when performing a numerical exercise.