Learning-by-doing and unemployment dynamics

Abstract

This paper attempts to assess the impact of skill loss on the persistence of cyclical unemployment. The observations from the Current Population Survey and the Bureau of Labor Statistics suggest a countercyclical total unemployment rate that exhibits high persistence. A framework that features search frictions is developed. Households choose search intensities, and firms create vacancies. Workers accumulate skills through past work experience, or a process of learning-by-doing. This paper extends the learning-by-doing framework to consider endogenous skill loss by the unemployed, or a process of loss-of-learning-by-not-doing. An adverse aggregate technological shock induces workers to reduce their search intensity and firms to reduce their creation of vacancies. As unemployment increases, workers lose their accumulated skills. The skill obsolescence causes a decline in the future marginal productivity of workers. The decline in productivity causes a persistence in the cyclical downturn, and a delay in the recovery of the economy. This allows the model to capture the observed unemployment persistence.