Staying on the Dole

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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