unemployment for retraining. Our analysis has determined generous welfare assistance, high tax
rates, and labor market tightness as the main amplifiers of the impact of skill loss on long-term
unemployment and thus as the main culprits of the European unemployment problem. In ad-
dition, we identify - in line with the empirical evidence - low-skilled workers and older workers
as particularly prone to human capital degradation and long-term unemployment. Finally our
analysis has emphasized the role of retraining costs and active labor market policies. These
policies are particularly important when the unemployed have present-biased preferences and
lack the willpower to retrain. In this case, voluntary short-term unemployment is like a slippery
slope and results in a permanent life on the dole, against ones best intentions.
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