Staying on the Dole

Staying on the Dole

Holger Strulik*, Jean-Robert Tyran** and Paolo Vanini^t

October 2006

Abstract. We develop a simple model of short- and long-term unemployment
to study how labor market institutions interact with labor market conditions
and personal characteristics of the unemployed. We analyze how the decision
to exit unemployment and to mitigate human capital degradation by retraining
depends on education, skill degradation, age, labor market tightness, taxes,
unemployment insurance benefits and welfare assistance. We extend our anal-
ysis by allowing for time-inconsistent choices and demonstrate the possibility
of an unemployment trap.

Keywords: Unemployment, Skill Degradation, Retraining, Unemployment
Benefits, Welfare Assistance, Present-Biased Preferences.

JEL: J64, J31, J38

^*University of Hannover, Department of Economics, Koenigsworther Platz 1, 30167 Hannover, Germany, email:
strulik@vwl.uni-hannover.de.

^**University of Copenhagen, Department of Economics, Studiestraede 6, 1455 Copenhagen K, Denmark, and
CEPR, 98 Goswell Road, London EC1V, email: jean-robert.tyran@econ.ku.dk. Tyran thanks the Austrian Science
Fund (FWF), under Project No. P17029 for financial support.

^tUniversity of Zurich, Department of Economics, Plattenstrasse 14, 8032 Zurich, Switzerland, email:

Vanini@isb.unizh.ch

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