Retraining and long-term unemployment in a model of unlearning by not doing

Abstract

This paper develops a dynamically consistent model of search, matching and bargaining when worker skills decline while unemployed. Long-term unemployment emerges as an endogenous phenomenon. Even with constant returns to matching, multiple Pareto rankable equilibria are possible. Policies to address long-term unemployment are best directed toward prevention (e.g. vacancy creation subsidies) rather than cure (e.g. retraining subsidies). 2000 Elsevier Science B.V. All rights reserved.