DP5967 Staying on the Dole

Author(s): Holger Strulik , Jean-Robert Tyran , Paolo Vanin

Publication Date: November 2006

Keyword(s): unemployment , skill degradation , retraining , unemployment benefits , welfare assistance , present-biased preferences

JEL(s): J31 , J38 , J64

Programme Areas: Labour Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP5967.asp.asp

We develop a simple model of short- and long-term unemployment to study how labour market institutions interact with labour market conditions and personal characteristics of the unemployed. We analyze how the decision to exit unemployment and to mitigate human capital degradation by retraining depends on education, skill degradation, age, labour market tightness, taxes, unemployment insurance benefits and welfare assistance. We extend our analysis by allowing for time-inconsistent choices and demonstrate the possibility of an unemployment trap.