Unemployment and deterioration of human capital

The paper deals with the deterioration of human capital during spells of unemployment. In our model the probability of leaving the unemployment pool decreases with the duration of unemployment. It can be shown that with a linear deterioration function and a simple distribution function for the reservation productivity of firms, unemployment duration is suitably described by a distribution of the Gompertz-Makeham type. In a numerical simulation it could be demonstrated that deterioration of human capital during unemployment affects the relation between vacancies and unemployment in a specific way: in the case of labour market slackness the steady-state Beveridge curve bends away markedly from the standard u-v-curve in an outward direction while in a situation of almost full employment the effects are negligible. For higher deterioration parameters the Beveridge curve may even be upward sloping in a situation of excess supply on the labour market, implying the existence of multiple equilibria. Empirical estimation of the distribution function with German labour market data 1984–1987 reveals that the multiple equilibrium case is likely to be relevant in reality.For valuable comments and suggestions I am grateful to W.Franz, A.Hamerle and an anonymous referee. Responsibility for remaining errors remains with the author.