Job competition, human capital, and the lock-in effect: can unemployment insurance efficiently allocate human capital

Workers, firms and policymakers often face a trade-off between shorter unemployment spells on the one hand, and better quality matches on the other. During recessions this manifests itself through job competition, where high skilled workers misallocate their labor to positions for which they are over-qualified in order get back to work faster. In the presence of job-specific human capital, as high skilled workers gain experience in this low skilled sector they may find themselves “locked in” to these jobs. This is because workers will not want to lose their seniority by searching for a job that better utilizes their general human capital. As a result, this misallocation can persist even in economic recoveries leading to inefficient outcomes. This paper explores such an economy and finds that a UI system that becomes more generous during a recession increases welfare and better allocates human capital over the business cycle.