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Retraining the Unemployed in a Matching Model with Turbulence

  • Felix Reichling

    (Department of Economics, Stanford University)

I investigate to what degree differences in retraining opportunities are responsible for the divergence of unemployment rates between the U.S. and Europe since the early 1980s. I provide some evidence for higher retraining rates in the U.S. as compared to Europe and further show that there is tremendous heterogeneity across OECD countries with respect to retraining. In my model, unemployed workers not only search for jobs but also for suitable retraining programs. I find that when it becomes more difficult to find suitable retraining programs, enrollment rates, productivity and the unemployment rate decline. Furthermore, this paper is the first attempt to investigate the role of retraining in economies that are subject to economic turbulences as described by Ljungqvist and Sargent (1998, 2004). Using a similar parametrization as Ljungqvist and Sargent (2004), I find that the generosity of unemployment benefits, the main driving force in their model, is not an important determinant of unemployment, even during tumultuous economic times, if sufficiently good retraining institutions are available. Economies with more flexible retraining institutions adjust better to economic turbulence, and as a result, feature lower unemployment rates and higher productivity and output. My results suggest that differences in retraining opportunities play an important role in explaining cross-country differences in unemployment rates.

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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 04-016.

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Date of creation: Mar 2005
Date of revision:
Handle: RePEc:sip:dpaper:04-016
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  3. Masters, Adrian, 2000. "Retraining the Unemployed in a Model of Equilibrium Employment," Bulletin of Economic Research, Wiley Blackwell, vol. 52(4), pages 323-40, October.
  4. Den Haan, Wouter & Haefke, Christian & Ramey, Gary, 2004. "Turbulence and Unemployment in a Job Matching Model," CEPR Discussion Papers 4765, C.E.P.R. Discussion Papers.
  5. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "Job reallocation, employment fluctuations and unemployment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228 Elsevier.
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  17. John P. Martin, 1998. "What Works Among Active Labour Market Policies: Evidence From OECD Countries' Experiences," OECD Labour Market and Social Policy Occasional Papers 35, OECD Publishing.
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