Self-Inflicted Unemployment Scarring and Stigma


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Self-Inflicted Unemployment Scarring and Stigma
Hugonnier J., Pelgrin F., St-Amour P.
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HEC Lausanne
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Long-term scars of unemployment include higher ex-post displacement, and income losses, as well as lower re-employment for longer unemployment spells (stigma). Human capital explanations assume it increases wages, and re-employment, and decreases displacement risk, but rely on tenure-based and/or employer decided acquisition only. We consider an alternative where investment decisions are made by workers, allowing for displacement and re-employment risks hedging, and assuming that the investment technology is independent of the employment status. We calculate analytically the joint optimal investment by the employed and the unemployed. We identify two dynamically stable steady-state values with a lower one for the unemployed generating cyclical dynamics whereby human capital optimally falls during unemployment spells, and increases again upon re-employment. It follows that scarring and stigma are endogenously generated as a by-product of decisions made by agents, and are therefore self-inflicted. We close the analysis by a counter-factual exercise allowing to gauge and confirm the importance of employment risks hedging in total demand for human capital, and that of moral hazard issues in the design of UIB programs
Human capital, unemployment duration dependence, unemployment stigma, and scarring, work displacement, re-employment probability
Create date
19/10/2017 10:23
Last modification date
21/08/2019 5:15
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