Their paper uses a dynamic search model, and therefore, is highly mathematical. But, for an intuitive flavor of what they do, here's the general thrust of their argument:
- Europe had much more generous unemployment insurance (and stronger union power), which led to a persistently higher unemployment rate.
- The high unemployment rate means that people spend longer periods of time out of work. During these bouts of unemployment, people lose skills. When working, people acquire skills from learning by doing. In economic lingo, a person's human capital declines when out of work, and rises when the person has a job. Therefore, a society with enduring high unemployment becomes relatively less productive over time.
To the extent that being unemployed leads us to lose our ability to work productively, this is a forboding tale. On the other hand, some people might use their time out of work to invest in education or training programs. For this group, being out of work has a silver lining. It can be an opportunity to improve.
This is the second post in unemployment week on This Young Economist. Economists view unemployed individuals' labor as an idle resource. With this idea in mind, tomorrow's post tackles the question "What does it mean to be idle?"