Equilibrium Unemployment, General Human Capital Depreciation and Optimal Training Subsidy

We analyse the optimal subsidy scheme of continuous vocational training in general human capital, considering a frictional labor market with general human capital depreciation during unemployment spell. When matched with a worker, a firm does not ex ante observe whether the worker has up-to-date knowledge or not. The model allows to identify two externalities; their respective correlations with the human capital depreciation rate have opposite signs. We then show that a rise in the depreciation rate during unemployment spell does not necessarily imply higher training subsidies. [PUB ABSTRACT] Reproduced by permission of Bibliothèque de Sciences Po