March 14, 2023
D. 144 Dupriez Building, Place Montesquieu 3
Cristina Lafuente Martinez
will give a presentation on
Hysteresis for the young: search capital and unemployment
This paper argues that search ability should be considered a distinct type of human capital. Workers are endowed with a search ability that determines their effectiveness of search, or their intrinsic job arrival rate. Workers build up their job search capital by interacting with the labour market, finding and moving on to different jobs. Long, stable employment spells without search erode their search capital over time. This channel has notable implications for modelling and policy in all labour markets, but it is particularly relevant in dual labour markets. In the presence of large, persistent negative shocks like the Great Recession, the inability of young workers to accumulate search capital can explain why they suffer larger increases in unemployment and long-term unemployment, something traditional hysteresis models struggle to explain. Using administrative data, I show that search capital, as proxied by the number of jobs a worker has had, is negatively correlated with unemployment duration. I build a heterogeneous agent search model with both productive and search human capital to show the effect that dynamic search capital has on workers’ lifetime utility. The calibrated model shows that despite the protective effects of accumulating search capital against aggregate shocks, the cost in terms of uncertainty outweighs the benefits. The model favours active labour market policies over employment incentives to tackle long-term unemployment among young workers.