European Unemployment: From a Worker’s Perspective

After several decades of low unemployment rates and low mean durations of unemployment, European countries experienced high rates and average durations of unemployment during the 1980’s and 1990’s. We impute these outcomes to the effects of increasing economic turbulence confronting displaced workers combined with the incentive effects on labor supply of generous European unemployment compensation systems. We use a general equilibrium search model where workers accumulate skills on the job and lose skills during unemployment. To highlight the forces at work, we perform an artificial natural experiment by comparing the decisions and life-time employment experiences of two initially identical workers. Although subjected to identical shocks, they make different decisions because they confront different unemployment compensation systems