Alteration in Skills and Career-Enhancing in a Frictional Labor Market

This article constructs a job-search model in which worker’s ability varies over time; a high-ability unemployed might lose her skills due to prolonged unemployment whereas a low-ability employed might acquire her skills due to (an implicit) on-the-job training. We numerically show that both pecuniary reward for short-term unemployed and reduction in unemployment benefits leads to lower unemployment rate, however, the former policy does stimulate career-enhancing of long-term unemployed whereas the latter does not. In addition, numerical analysis suggests that mixture of the two policy can lead to higher aggregate welfare than under a sole policy