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Training and Search during Unemployment

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  • Spinnewijn, Johannes
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    Abstract

    This paper incorporates training in the design of unemployment policies. Human capital falls upon displacement and continuously depreciates during unemployment. While training counters the decrease in human capital, it also affects the willingness of the unemployed to search. I characterize the optimal insurance contract when participation to training programs with varying intensity during the unemployment spell can be enforced by the social planner. The analysis provides three sets of results. First, the introduction of training qualifies previous results on the optimal consumption path during unemployment; the optimal path may be constant rather than downward-sloping for the short-term unemployed and downward-sloping rather than constant for the long-term unemployed. Second, the optimal contract never stops encouraging the long-term unemployed to leave unemployment. The imposed training programs make their human capital converge to a unique, positive level. Third, the practice of targeting training programs towards long-term unemployed is optimal only if the fall in human capital upon displacement is small relative to the depreciation rate during unemployment. Moreover, numerical simulations suggest that the welfare gains from introducing training programs are substantial, but only if the fall in human capital upon displacement is relatively large.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7779.

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    Date of creation: Apr 2010
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    Handle: RePEc:cpr:ceprdp:7779

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    Related research

    Keywords: Human Capital; Optimal Insurance; Training; Unemployment;

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    References

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    1. Robert Shimer & Ivan Werning, 2005. "Liquidity and Insurance for the Unemployed," NBER Working Papers 11689, National Bureau of Economic Research, Inc.
    2. Hamish Low & Costas Meghir & Luigi Pistaferri, 2008. "Wage risk and employment risk over the life cycle," IFS Working Papers W08/06, Institute for Fiscal Studies.
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    4. Paul Frijters & Bas van der Klaau, 2003. "Job Search with Nonparticipation," Paul Frijters Discussion Papers 2003-3, School of Economics and Finance, Queensland University of Technology.
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    6. Coles, Melvyn & Masters, Adrian, 2000. "Retraining and long-term unemployment in a model of unlearning by not doing," European Economic Review, Elsevier, vol. 44(9), pages 1801-1822, October.
    7. Hugo A. Hopenhayn & Juan Pablo Nicolini, 2009. "Optimal Unemployment Insurance and Employment History," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 1049-1070.
    8. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
    9. 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.
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    11. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-62, December.
    12. David Card & Raj Chetty & Andrea Weber, 2007. "Cash-On-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 122(4), pages 1511-1560, November.
    13. Conny Wunsch, 2013. "Optimal Use of Labor Market Policies: The Role of Job Search Assistance," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 1030-1045, July.
    14. 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, vol. 50(2), pages 323-362, 05.
    15. Pavoni, Nicola, 2007. "On optimal unemployment compensation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1612-1630, September.
    16. Heckman, James J. & Lalonde, Robert J. & Smith, Jeffrey A., 1999. "The economics and econometrics of active labor market programs," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 31, pages 1865-2097 Elsevier.
    17. Pissarides, Christopher A, 1992. "Loss of Skill during Unemployment and the Persistence of Employment Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1371-91, November.
    18. Acemoglu, Daron, 1995. "Public Policy in a Model of Long-Term Unemployment," Economica, London School of Economics and Political Science, vol. 62(246), pages 161-78, May.
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