Skill Accumulation in the Market and at Home

Abstract:

This paper incorporates learning by doing in home and market production into a stochastic directed search model. Workers’ labor supply choices affect skill accumulation in both the home and market sectors, making the distributions of workers across employment states endogenous and persistent state variables. The optimal search behavior by an unemployed worker implies that the job finding probability is much more sensitive than the reemployment wage to the duration of unemployment, two facts which have been documented empirically. The model is calibrated to US data, and implies a nontrivial role for true duration dependence in the decline of the job finding probability. The model framework can easily accommodate business cycles, and the mechanism predicts that the optimal response of agents’ decisions after an aggregate shock generates an asymmetric response of the unemployment rate during and after recessions, with more severe recessions resulting in more persistent unemployment.