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Unemployment and Deterioration of Human Capital: A Labour Market Model with Hysteresis Implications

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  • Moller, Joachim

Abstract

The paper deals with the deterioration of human capital during spells of unemployment. In our model the probability of leaving the unemployment pool decreases with the duration of unemployment. It can be shown that with a linear deterioration function and a simple distribution function for the reservation productivity of firms, unemployment duration is suitably described by a distribution of the Gompertz-Makeham type. In a numerical simulation it could be demonstrated that deterioration of human capital during unemployment affects the relation between vacancies and unemployment in a specific way: in the case of labour market slackness the steady-state Beveridge curve markedly bends away from the standard u-v-curve in an outward direction while in an almost full employment situation the effects are negligible. For higher deterioration parameters the Beveridge curve may even be upward sloping in a situation of excess supply on the labour market implying the existence of multiple equilibria. Empirical estimation of the distribution function with German labour market data 1984-1987 reveals that the multiple equilibrium case is likely to be relevant in reality.
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Suggested Citation

  • Moller, Joachim, 1990. "Unemployment and Deterioration of Human Capital: A Labour Market Model with Hysteresis Implications," Empirical Economics, Springer, vol. 15(2), pages 199-215.
    • Handle: RePEc:spr:empeco:v:15:y:1990:i:2:p:199-215
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    1. Holger Feist, 1998. "Wage-distance regulation in social-welfare programs: An option-theory perspective," Journal of Economics, Springer, vol. 68(3), pages 271-293, October.

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