THE COST OF HUMAN CAPITAL DEPRECIATION DURING UNEMPLOYMENT

This paper argues that human capital depreciation during unemployment generates an externality in job creation: firms ignore how their hiring decisions affect the skill composition of the future unemployment pool, and hence the output produced by new hires. As a consequence. job creation is too low from a social point of view. But the extent to which it is too low varies over the cycle. The reason is that the increase in the expected productivity of a new hire from next period's unemployment pool caused by hiring an additional worker today, depends on the pool's composition, which varies over the cycle.

Automated summary

This paper argues that human capital depreciation during unemployment generates an externality in job creation: firms ignore how their hiring decisions affect the skill composition of the future unemployment pool, and hence the output produced by new hires. As a consequence, job creation is too low from a social point of view. However, the extent to which it is too low varies over the cycle, depending on the composition of the unemployment pool which influences the expected productivity of new hires.