Training and search during unemployment

Displaced workers often experience large losses in earnings even a long time after reemployment. Training programs during unemployment mitigate these losses but also affect the unemployed's willingness to search. This paper analyzes how mandatory training programs affect the optimal design of unemployment insurance and how the training intensity should evolve during the unemployment spell. The introduction of training reverses the optimal consumption dynamics during the unemployment spell and makes it optimal to incentivize the long-term unemployed to find employment despite the depreciation of their human capital. Targeting training programs towards the long-term unemployed, however, is optimal only if the fall in human capital upon displacement is small relative to the depreciation during unemployment.

► I characterize the optimal UI policy combining UI benefits and mandatory training programs. ► Training counters human capital losses, but also affects the incentives to search. ► The integration of training changes the optimal profile of benefits and taxes. ► The optimal timing of training is related to different sources of human capital loss. ► Numerical simulations suggest the complementary value of training and UI benefits.