Worker heterogeneity, selection, and employment dynamics in the face of aggregate demand and pandemic shocks

Federico Ravenna and Carl Walsh

No 15043, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-dge and nep-mac
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