Loss of skill during unemployment and the persistence of employment shocks
AuthorPissarides, Christopher A.
SourceQuarterly Journal of Economics
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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. © President and Fellows of Harvard College and the Massachusetts Institute of Technology.