We show that business cycles reduce welfare through a decrease in the average level of employment in a labor market search model with learning on the job and skill loss during unemployment. Empirically, unemployment and the job-finding rate are negatively correlated. Since new jobs are the product of these two from the employment transition equation, business cycles imply fewer new jobs. Learning on the job implies that the resulting decrease in employment reduces aggregate human capital. This reduces incentives to post vacancies, further decreasing employment and human capital. We quantify this mechanism and find large output and welfare costs of business cycles.
Walentin, Karl, and Andreas Westermark.
"Learning on the Job and the Cost of Business Cycles."
American Economic Journal: Macroeconomics,
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Business Fluctuations; Cycles
Human Capital; Skills; Occupational Choice; Labor Productivity
Labor Turnover; Vacancies; Layoffs