Loss of Skill during Unemployment and the Persistence of Employment Shocks.

This paper shows that when unemployed workers lose some of their skills, the effects of a temporary shock to employment can persist for a long time. The key mechanism is a thin market externality that reduces the supply of jobs when the duration of unemployment increases. The paper develops an overlapping-generations model of search equilibrium and shows that different patterns of persistence and multiple equilibria are possible even with constant returns production and matching technologies. Copyright 1992, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.