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Diskussionspapiere - Hannover Economic Papers (HEP)

Staying on the Dole

Autor: Holger Strulik, Jean-Robert Tyran and Paolo Vanini
Nummer: 377, Oct 2007, pp. 30
JEL-Class: J64, J31, J38

We develop a simple model of labor market participation, human capital degradation, and re-training. We focus on how non-participation, as a distinct state from unemployment and employment, is determined by the welfare system in interaction with labor market conditions and personal characteristics. We provide a tractable framework to analyze how the decisions to exit the labor force and to mitigate human capital degradation by re-training depend on a broad range of factors such as education, skill degradation, age, labor market shocks, labor taxes, unemployment insurance benefits and social assistance. We extend our framework by allowing for time-inconsistent choices and demonstrate the possibility of an unemployment trap.


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