This paper presents a structural estimation of a life cycle model with unemployment risk. The model allows for human capital depreciation during unemployment. It is estimated using German and US household-level data. The data suggest that the adverse impact of unemployment on individual productivity is important in both countries, but quantitatively more relevant in Germany. Moreover, simulations show that the combination of skill depreciation with the generous unemployment insurance system that was in place in Germany until recently is a key factor in explaining the differences in labour market performance between these countries.
