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Pandemic Recession: L- or V-Shaped?

Quarterly Review 4011 | Published May 27, 2020

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Pandemic Recession: L- or V-Shaped?

Abstract

We develop and calibrate a search-theoretic model of the labor market in order to forecast the evolution of the aggregate US labor market during and after the coronavirus pandemic. The model is designed to capture the heterogeneity of the transitions of individual workers across states of unemployment and employment and across different employers. The model is designed also to capture the trade-offs in the choice between temporary and permanent layoffs. Under reasonable parametrizations of the model, the lockdown instituted to prevent the spread of the novel coronavirus is shown to have long-lasting negative effects on unemployment. This is because the lockdown disproportionately disrupts the employment of workers who need years to find stable jobs.


This article was previously published as Working Paper 766, https://doi.org/10.21034/wp.766.