Abstract
In an environment of intense structural change being unemployed conveys a bad signal. A simple model is developed which accounts for the stagnancy of the unemployment pool in transitional economies in spite of major worker reallocation occurring in these countries. The model predicts that the tightening of unemployment benefits can hardly boost outflows to jobs once mass unemployment has built-up as there are at this stage too many low-productivity workers in the pool. The implications of the model are consistent with evidence on gross job flows, wage differentials, and the effects of the tightening of unemployment benefit systems in Eastern Europe.
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