We develop a simple model of the individual labor market status and study how employment, unemployment, and non-participation are determined by labor market institutions in interaction with labor market conditions and personal characteristics. We analyze how the decisions to withdraw from the labor force, to re-enter employment, and to mitigate human capital degradation by retraining depends on education, skill degradation, age, labor market tightness, taxes, unemployment insurance benefits and welfare assistance. We extend our analysis by allowing for time-inconsistent choices and demonstrate the possibility of an unemployment trap. |
