Searching for Job Security and the Consequences of Job Loss

This paper studies a labor market where workers search for both more productive and more secure employment. In this environment, an unemployment spell begets future unemployment spells and the hazard rate into unemployment declines with tenure. In a laissez-faire economy, workers overvalue job security relative to productivity and unemployment benefits can increase welfare. I estimate the framework on German Social Security data and use it to study quantitatively the consequences of job loss. The model explains the large and highly persistent response in wages and employment known as the “unemployment scar”. The key driver of the long term losses is the original loss of job security and its interaction with the evolution of human capital.