The paper by Lars Ljungqvist and Thomas J. Sargent examines the rise in unemployment in European welfare states since the 1980s, attributing it to the welfare state's diminished ability to cope with economic turbulence. They use a general equilibrium search model where workers accumulate skills on the job and lose skills during unemployment. The authors argue that high income taxation and generous welfare benefits distort workers' labor supply decisions, leading to adverse dynamic responses to economic shocks. They find that the welfare state is more vulnerable to economic shocks and turbulence, resulting in higher unemployment rates compared to a laissez-faire economy. The model demonstrates that increased turbulence in the economic environment, such as changes in earnings distributions and intertemporal volatility, leads to higher steady-state unemployment in welfare states. The paper also compares the responses of the welfare state and laissez-faire economies to a transient economic shock, showing that the welfare state experiences a prolonged period of high unemployment. Finally, it explores how persistent economic turbulence increases unemployment in welfare states, with the welfare state's higher unemployment rate and longer average unemployment spells being more pronounced in turbulent environments.The paper by Lars Ljungqvist and Thomas J. Sargent examines the rise in unemployment in European welfare states since the 1980s, attributing it to the welfare state's diminished ability to cope with economic turbulence. They use a general equilibrium search model where workers accumulate skills on the job and lose skills during unemployment. The authors argue that high income taxation and generous welfare benefits distort workers' labor supply decisions, leading to adverse dynamic responses to economic shocks. They find that the welfare state is more vulnerable to economic shocks and turbulence, resulting in higher unemployment rates compared to a laissez-faire economy. The model demonstrates that increased turbulence in the economic environment, such as changes in earnings distributions and intertemporal volatility, leads to higher steady-state unemployment in welfare states. The paper also compares the responses of the welfare state and laissez-faire economies to a transient economic shock, showing that the welfare state experiences a prolonged period of high unemployment. Finally, it explores how persistent economic turbulence increases unemployment in welfare states, with the welfare state's higher unemployment rate and longer average unemployment spells being more pronounced in turbulent environments.