Loss of skill during unemployment and TFP differences across countries

In an economy with search and matching frictions in which workers lose human capital during unemployment, TFP becomes endogenous and depends on workers' unemployment history. Using available estimates of labor market flows for a sample of OECD countries, this paper quantifies the amount of TFP differences due to skill losses during unemployment among developed countries. Continental European countries, with their low job finding rates, exhibit the lowest TFPs. Nordic countries display the highest levels of TFP due to their high job finding rate relative to the separation rate. TFP in Anglo-Saxon countries stands in-between the two groups. The paper further studies the effect of hiring subsidies on TFP and the labor market. Because TFP changes depend on the vacancy posting decision of firms, countries with the lowest TFP do not necessarily experience the largest productivity improvements from the policy implementation.