THE CYCLICAL BEHAVIOR OF UNEMPLOYMENT AND VACANCIES WITH LOSS OF SKILLS DURING UNEMPLOYMENT

This paper studies the cyclical fluctuations in unemployment and vacancies in a search and matching model in which workers lose skills during periods of unemployment. Firms' profits fluctuate more because aggregate productivity affects the economy's average human capital. Moreover, wages for workers with lower levels of human capital are closer to the value of nonmarket time, leading to more rigid wages. Fluctuations in the vacancy-unemployment ratio are larger than those in the baseline search and matching model and similar to those we observe in the data.