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The Cost of Human Capital Depreciation during Unemployment

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  • Lien Laureys

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    (Bank of England)

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    Abstract

    Skill erosion during unemployment was of particular concern as unemployment duration increased in the Great Recession. I argue that it generates an externality in job creation: firms ignore how their hiring decisions affect the unemployment pool’s skill composition, and hence the expected output produced by new hires. As a consequence, job creation is too low from a social point of view. But the extent to which it is too low varies over the cycle. This is because the externality’s magnitude, which depends on the impact of job creation on the pool’s skill composition, reduces when the share of unemployed workers who already have eroded skills increases.

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    File URL: http://www.centreformacroeconomics.ac.uk/pdf/CFMDP2014-20-Paper.pdf
    File Function: First version, 2014
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    Bibliographic Info

    Paper provided by Centre for Macroeconomics (CFM) in its series Discussion Papers with number 1420.

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    Length: 60 pages
    Date of creation: Jul 2014
    Date of revision:
    Handle: RePEc:cfm:wpaper:1420

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    Web page: http://www.centreformacroeconomics.ac.uk/
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    1. Robert Shimer & Iván Werning, 2006. "On the Optimal Timing of Benefits with Heterogeneous Workers and Human Capital Depreciation," NBER Working Papers 12230, National Bureau of Economic Research, Inc.
    2. Ljungqvist, Lars & Sargent, Thomas J., 2007. "Understanding European unemployment with matching and search-island models," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(8), pages 2139-2179, November.
    3. Nicola Pavoni, 2009. "Optimal Unemployment Insurance, With Human Capital Depreciation, And Duration Dependence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 323-362, 05.
    4. Kory Kroft & Fabian Lange & Matthew J. Notowidigdo, 2013. "Duration Dependence and Labor Market Conditions: Evidence from a Field Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 128(3), pages 1123-1167.
    5. Tomaz Cajner & Isabel Cairo, 2011. "Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability," 2011 Meeting Papers 1145, Society for Economic Dynamics.
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