The cost of human capital depreciation during unemployment

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 22 August 2014

Working Paper No. 505
By Lien Laureys 

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 output produced by other firms’ 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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