Temporary Unemployment and Labor Market Dynamics During the COVID-19 Recession

Jessica Gallant · Kory Kroft · Fabian Lange · Matthew J. Notowidigdo

52 citations0/0 files storedNational Bureau of Economic Research

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Labor market dynamics and wage inequality COVID-19 Pandemic Impacts Unemployment and Economic Growth

Abstract

This paper develops a search-and-matching model that incorporates temporary unemployment and applies the model to study the labor market dynamics of the COVID-19 recession in the US. We calibrate the model using panel data from the Current Population Survey for 2001-2019, and we find that the model-based job finding rates match observed job finding rates during the entire sample period and out-of-sample up through July 2020. We also find that the Beveridge curve is well-behaved and displays little change in market tightness in 2020 once we use the calibrated model to adjust for changes in the composition of the unemployed. We then use the model to project the path of unemployment over the next 18 months. Under a range of assumptions about job losses and labor demand, our model predicts a more rapid recovery compared to a model that does not distinguish between temporary and permanent unemployment and compared to professional and academic forecasts. We find that in order to rationalize the professional forecasts of the unemployment rate, some combination of the vacancy rate, job separation rate, and recall rate of workers on temporary layoff must deteriorate substantially from current levels in the next several months.

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References

2007Reassessing the Ins and Outs of Unemployment 2020Fear, lockdown, and diversion: Comparing drivers of pandemic economic decline 2020 2020How are Small Businesses Adjusting to COVID-19? Early Evidence from a Survey 1990Unemployment Insurance, Recall Expectations, and Unemployment Outcomes 1999The Measurement of Unemployment: An Empirical Approach 2014Are the Long-Term Unemployed on the Margins of the Labor Market?2010The Labor Market in the Great Recession 2011Unemployment Insurance and Job Search in the Great Recession

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