The Cost of Job Loss

Abstract

This article identifies an equilibrium theory of wage formation and endogenous quit turnover in a labour market with on-the-job search, where risk averse workers accumulate human capital through learning-by-doing and lose skills while unemployed. Optimal contracting implies the wage paid increases with experience and tenure. Indirect inference using German data determines the deep parameters of the model. The estimated model not only reproduces the large and persistent fall in wages and earnings following job loss, a new structural decomposition finds foregone human capital accumulation (while unemployed) is the worker’s major cost of job loss.