DP5967 Staying on the Dole

Author(s): Holger Strulik, Jean-Robert Tyran, Paolo Vanin
Publication Date: November 2006
Keyword(s): present-biased preferences, retraining, skill degradation, unemployment, unemployment benefits, welfare assistance
JEL(s): J31, J38, J64
Programme Areas: Labour Economics, Public Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5967

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.