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 het- erogeneity of the transitions of individual workers across states of unemploy- ment and employment and across different employers. The model is designed also to capture the trade-offs in the choice between temporary and perma- nent layoffs. Under reasonable parameterizations 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 ofworkers who need years to find stable jobs