Search capital and unemployment duration

Abstract

In the last recession, the increase in long-term unemployment has been higher for younger workers than for older age groups. I propose a novel mechanism, search capital, to explain long-term unemployment patterns across different ages along the business cycle: ceteris paribus workers who have been successful in finding jobs in the recent past become more efficient at finding jobs in the present. Search ability increases with successful search experience and depreciates with tenure if workers do not search often enough. In labour markets where short-term jobs are a significant share of employment, this mechanism can explain cyclical bursts of long-term unemployment. Using Spanish administrative data, I provide empirical evidence that search capital, as proxied by the number of temporary jobs a worker has had, is negatively correlated with unemployment duration. The addition of search capital to a standard search model manages to replicate these empirical findings while also generating increases of long-term unemployment by age and along the business cycle that are consistent with the data. Although workers with stable jobs have higher welfare than workers with many employment spells when the economy is booming, they suffer higher losses during recessions because of their lower search capital.