Working Paper: CEPR ID: DP15043
Authors: Federico Ravenna; Carl Walsh
Abstract: In a new Keynesian model with random search in the labor market, endogenous selection among heterogeneous workers amplifies fluctuations in unemployment and results in excess unemployment volatility relative to the efficient allocation. Recessions disproportionately affect low-productivity workers, whose unemployment spells are inefficiently frequent and long. We consider a COVID-recession resulting from a negative demand shock and a surge in exogenous separations. High-productivity workers benefit if separations in a pandemic take the form of temporary layoffs, but this is not true for low-productivity workers. The unemployment consequences are especially severe when nominal interest rates are close to the effective lower bound.
Keywords: unemployment; heterogeneity; selection; COVID-19; ZLB constraint
JEL Codes: E24; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| endogenous selection among heterogeneous workers (J79) | amplified fluctuations in unemployment (E32) |
| low-productivity workers disproportionately affected during recessions (J79) | amplified fluctuations in unemployment (E32) |
| high-productivity workers benefit from temporary layoffs (J65) | differential impact on unemployment outcomes (J65) |
| low-productivity workers do not benefit from temporary layoffs (J65) | differential impact on unemployment outcomes (J65) |
| nominal interest rates at effective lower bound (E43) | exacerbated unemployment consequences of negative demand shocks (J64) |