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The Cost of Human Capital Depreciation During Unemployment

Author

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  • Lien Laureys

Abstract

This paper argues that human capital depreciation during unemployment generates an externality in job creation: firms ignore how their hiring decisions affect the skill composition of the future unemployment pool, and hence the 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. The reason is that the increase in the expected productivity of a new hire from next period’s unemployment pool caused by hiring an additional worker today, depends on the pool’s composition, which varies over the cycle.

Suggested Citation

  • Lien Laureys, 2021. "The Cost of Human Capital Depreciation During Unemployment," The Economic Journal, Royal Economic Society, vol. 131(634), pages 827-850.
    • Handle: RePEc:oup:econjl:v:131:y:2021:i:634:p:827-850.
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    File URL: http://hdl.handle.net/10.1093/ej/ueaa081
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    Cited by:

    1. Grabe Mpendulo & Eric E. Mang’unyi, 2018. "Exploring Relationships between Education Level and Unemployment," Journal of Social Sciences (COES&RJ-JSS), , vol. 7(2), pages 86-102, April.
    2. Laureys, Lien, 2014. "Optimal monetary policy in the presence of human capital depreciation during unemployment," LSE Research Online Documents on Economics 58006, London School of Economics and Political Science, LSE Library.
    3. Jackson, Paul & Ortego-Marti, Victor, 2024. "Skill loss during unemployment and the scarring effects of the COVID-19 pandemic," Labour Economics, Elsevier, vol. 88(C).
    4. Konstantinos Angelopoulos & Wei Jiang & James Malley, 2017. "Targeted fiscal policy to increase employment and wages of unskilled workers," Studies in Economics 1704, School of Economics, University of Kent.
    5. Driouchi, Ahmed, 2015. "Threats to Skills of Unemployed Qualified Labor in Arab Economies," MPRA Paper 67361, University Library of Munich, Germany.
    6. Ortego-Marti, Victor, 2017. "Differences in skill loss during unemployment across industries and occupations," Economics Letters, Elsevier, vol. 161(C), pages 31-33.
    7. Juan C. Córdoba & Anni T. Isojärvi & Haoran Li, 2023. "Endogenous Bargaining Power and Declining Labor Compensation Share," Finance and Economics Discussion Series 2023-030, Board of Governors of the Federal Reserve System (U.S.).
    8. Prein, Timm, 2019. "Persistent Unemployment, Sovereign Debt Crises, and the Impact of Haircuts," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203654, Verein für Socialpolitik / German Economic Association, revised 2019.
    9. Lei Fang & Jun Nie, 2014. "Human Capital Dynamics and the U.S. Labor Market," FRB Atlanta Working Paper 2014-2, Federal Reserve Bank of Atlanta.
    10. Ross Doppelt, 2019. "Skill Flows: A Theory of Human Capital and Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 84-122, January.
    11. Ortego-Marti, Victor, 2017. "Loss of skill during unemployment and TFP differences across countries," European Economic Review, Elsevier, vol. 100(C), pages 215-235.
    12. Konstantinos Angelopoulos & Wei Jiang & James Malley, 2015. "Fiscal multipliers in a two-sector search and matching model," Studies in Economics 1502, School of Economics, University of Kent.
    13. Peltonen, Juho, 2023. "On the efficiency of labor markets with short-time work policies," MPRA Paper 119165, University Library of Munich, Germany.
    14. Driouchi, Ahmed, 2014. "Unemployment Persistence & Risks of Skill Obsolescence in Arab Countries," MPRA Paper 53793, University Library of Munich, Germany.
    15. Pedro Gomes, 2015. "The importance of frequency in estimating labour market transition rates," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-10, December.
    16. Jiaqi Ge & Bernardo Alves Furtado, 2024. "Modelling urban transition with coupled housing and labour markets," Environment and Planning B, , vol. 51(3), pages 590-609, March.
    17. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James, 2015. "Fiscal multipliers in a two-sector search and matching model," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-67, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    18. Duan, Jie & Jackson, Paul, 2025. "The underemployment trap," Journal of Monetary Economics, Elsevier, vol. 155(C).
    19. Zamanzadeh, Akbar & Chan, Marc K. & Ehsani, Mohammad Ali & Ganjali, Mojtaba, 2020. "Unemployment duration, Fiscal and monetary policies, and the output gap: How do the quantile relationships look like?," Economic Modelling, Elsevier, vol. 91(C), pages 613-632.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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