Sectoral shocks, reallocation, and labor market policies

Joaquín García-Cabo, Anna Lipińska and Gaston Navarro

No 1095, BIS Working Papers from Bank for International Settlements

Abstract: Unemployment insurance and wage subsidies are key tools to support labor markets in recessions. We develop a multi-sector search and matching model with on-the-job human capital accumulation to study labor market policy responses to sector-specific shocks. Our calibration accounts for structural differences in labor markets between the United States and the euro area, including a lower job-finding rate in the latter. We use the model to evaluate unemployment insurance and wage subsidy policies in recessions of different duration. After a temporary sector-specific shock, unemployment insurance improves reallocation toward productive sectors at the cost of initially higher unemployment and, thus, human capital destruction. By contrast, wage subsidies reduce unemployment and preserve human capital at the cost of limiting reallocation. In the United States, unemployment insurance is preferred to wage subsidies when it does not distort job creation for too long. In the euro area, wage subsidies are preferred, given the lower job-finding rate and reallocation.

Keywords: labor market policies; search and matching frictions; reallocation (search for similar items in EconPapers)
JEL-codes: E24 J64 J68 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-des, nep-dge, nep-eec and nep-lab
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Sectoral shocks, reallocation, and labor market policies (2023)
Working Paper: Sectoral Shocks, Reallocation, and Labor Market Policies (2022)
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