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

48 Pages Posted: 30 Sep 2020

See all articles by Jessica Gallant

Jessica Gallant

University of Toronto

Kory Kroft

University of Toronto

Fabian Lange

McGill University

Matthew Notowidigdo

University of Chicago - Booth School of Business

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Date Written: August 30, 2020

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 the recall rate of workers on temporary layoff must deteriorate substantially from current levels in the next several months.

Suggested Citation

Gallant, Jessica and Kroft, Kory and Lange, Fabian and Notowidigdo, Matthew, Temporary Unemployment and Labor Market Dynamics During the COVID-19 Recession (August 30, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-141, Available at SSRN: https://ssrn.com/abstract=3702514 or http://dx.doi.org/10.2139/ssrn.3702514

Jessica Gallant

University of Toronto

Kory Kroft

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Fabian Lange

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Matthew Notowidigdo (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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