Figure 3: Career Diagram without STU
LTU Employed
(λ0 = λτ = λ), implying that the sign of the derivative equals the sign of
b(1 - θ)λ(δτ + δT) - s(1 - b).
A degenerate case may occur if s is very high and b is low. Then, social benefits are so generously
granted compared to unemployment benefits that increasing eligibility for unemployment ben-
efits entails the dominating negative effect of delaying waiting time until eligibility for welfare
assistance. Of course, without welfare assistance (s = 0) this channel is always closed.
LTU is independent from retraining costs and human capital degradation because the choice
is between being never and always unemployed (∂hB/∂d = ∂hB/∂c = 0). The other derivatives
are in line with the case discussed in the main text: LTU increases for higher unemployment
benefits, higher welfare assistance, higher taxes rates, and higher labor market frictions.
24
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