Working Paper: CEPR ID: DP7779
Authors: Johannes Spinnewijn
Abstract: This paper incorporates training in the design of unemployment policies. Human capital falls upon displacement and continuously depreciates during unemployment. While training counters the decrease in human capital, it also affects the willingness of the unemployed to search. I characterize the optimal insurance contract when participation to training programs with varying intensity during the unemployment spell can be enforced by the social planner. The analysis provides three sets of results. First, the introduction of training qualifies previous results on the optimal consumption path during unemployment; the optimal path may be constant rather than downward-sloping for the short-term unemployed and downward-sloping rather than constant for the long-term unemployed. Second, the optimal contract never stops encouraging the long-term unemployed to leave unemployment. The imposed training programs make their human capital converge to a unique, positive level. Third, the practice of targeting training programs towards long-term unemployed is optimal only if the fall in human capital upon displacement is small relative to the depreciation rate during unemployment. Moreover, numerical simulations suggest that the welfare gains from introducing training programs are substantial, but only if the fall in human capital upon displacement is relatively large.
Keywords: Human Capital; Optimal Insurance; Training; Unemployment
JEL Codes: H21; J62; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Training programs (M53) | Optimal consumption path during unemployment (J64) |
| Training programs (M53) | Human capital depreciation (J24) |
| Training programs (M53) | Incentives to search for jobs (J68) |
| Human capital depreciation (J24) | Optimal consumption path during unemployment (J64) |
| Training programs (M53) | Social assistance state (I38) |
| Initial fall in human capital (J24) | Targeting training programs towards long-term unemployed (J68) |