depreciates with technical progress and it depreciates the faster, the longer the un-
employment duration takes. Due to this skill-depreciation, firms are reluctant to
hire long-term unemployed implying that only short-term unemployed are matched
with new vacancies. Therefore, long-term unemployment emerges as endogenous
phenomenon and it increases as qualification-mismatch rises.
These implications are derived in a growth-matching-model with the labor mar-
ket characterized by matching-frictions and capital accumulation is described by a
neoclassical growth process.4 Matching-frictions represent the search process needed
to fill vacancies and the search process is modelled as taking place between job va-
cancies and unemployed workers.5 Even in equilibrium, which is defined as a flow
equilibrium, i.e. inflows are equal to outflows, the labor market is marked by search
or matching-frictions. If no frictions were present, laid-off workers would find imme-
diately new jobs and equilibrium unemployment would not exist. The existence of
frictions implies further that outflows depend on the labor market tightness induc-
ing that the matching-probability is influenced by the levels of unemployment and
vacancies. Therefore, each trading partner faces market externalities determined by
the number of traders on each side of the market.6
Furthermore, due to matching-frictions, trading partners have some monopoly power
and successful matching yields additional profits which are shared between firms and
workers. The division of profits can be modelled by a Nash bargaining approach or
simply by sharing the additional produced marginal product with the sharing pro-
portions are determined by the bargaining power of the trading partners.7 It is
assumed that all job-workers pair are equally productive. Wages are then deter-
mined by the sharing rule.
The unemployment pool consists of heterogeneous unemployed workers and the frac-
tion of long-term unemployment is determined by the duration of unemployment
itself and by the rate of technical progress. The positive dependence between the
average duration of unemployment and the fraction of long-term unemployed can
be justified by the extreme skill-depreciation and by the motivation losses of the
4The model is similar to that of PlSSARlDES (1990). For an endogenous growth model with
matching see for example PθSTEL-VlNAY (1998) and for a RBC-model see for example Merz
(1995, 1999).
5See also Blaxchard, Diamond (1994, 1989).
6See also Merz (1995) and Feve, Langot (1996).
7See also Gries, Jungblut, Meyer (1997 a, b).
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