Staying on the Dole

Figure 2: Involuntary Unemployment

_{LTU                  STU}                  Employed

invol. LTU        invol. STU

retrain), the present-biased value of life-time income becomes

implying that they will retrain if

c < β(1 — τ)δ_τ.

They will not retrain if the costs of retraining fulfill

β<δτ <  ---< < δ>τ.

1-θ

If condition (15) holds, present-biased agents do not retrain when they lose eligibility for un-
employment benefits although they originally planned to use the STU spell to upgrade their
skills.

Figure 2 illustrates the consequences of a failed retraining episode depending on the worker’s
initial skill level. Because retraining was, in principle, worthwhile, failed retraining shifts life-
time income V(h,τ) downwards. At the upper end of the education spectrum, between h'C
and h_C , we find those workers who would have preferred to be employed had they known

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