2012), The cost of Human Capital Depreciation during Unemployment, Working Paper

Abstract. There is evidence that workers ’ skills erode during periods of unemployment. This issue seems of particular concern now that unemployment duration has increased in the Great Recession. I argue that loss of skill during unemployment generates an externality in job creation: firms ignore how their hiring decisions affect the skill composition of the unemployment pool, and hence the output produced by new hires. Overall, job creation is too low, but contrary to conventional wisdom less so in recessions than in booms. The larger share of job-seekers with eroded skills in the unemployment pool in recessions lowers the social cost of having a worker losing her skills because it decreases the expected difference in productivity between a new hire and a job-seeker with eroded skills. As a consequence, everything else equal, loss of skill during unemployment may warrant procyclical employment subsidies