We revisit the role of temporary layoffs in the business cycle. While some have emphasized a stabilizing effect due to recall hiring, we quantify from the data an important countercyclical destabilizing effect due to " loss-of-recall," whereby workers in temporary-layoff unemployment lose their job permanently. We develop a quantitative model allowing for endogenous flows of workers across employment and both temporary-layoff and jobless unemployment. The model captures both pre-and post-pandemic unemployment dynamics, including the contractionary role of loss-of-recall. We use our structural model to show that the Paycheck Protection Program generated sizable employment gains, in part by significantly reducing loss-of-recall. (JEL E24, E32, I12, J41, J63, J64)

We compute new estimates of Total Factor Productivity (TFP) growth in the five largest European economies. Our estimates account for positive profits and use firm surveys to proxy for unobserved changes in factor utilization. These novelties have a major impact: our estimated TFP growth series are substantially less volatile and less cyclical than the ones obtained with standard methods. Based on our approach, we provide annual industry-level and aggregate TFP series, as well as the first estimates of profit and utilization-adjusted quarterly TFP growth in Europe/

We study the importance of financial markets for (un)employment fluctuations in a model with searching and matching frictions where firms issue debt under limited enforcement. Higher debt allows employers to bargain lower wages which in turn increases the incentive to create jobs. The transmission mechanism of 'credit shocks' is fundamentally different from the typical credit channel and the model can explain why firms cut hiring after a credit contraction even if they have not shortage of funds for hiring workers. The theoretical predictions are consistent with the estimation of a structural VAR whose identifying restrictions are derived from the theoretical model.

We study the stabilizing role of benefit extensions. We develop a tractable quantitative model with heterogeneous agents, search frictions, and nominal rigidities. The model allows for a stabilizing aggregate demand channel and a destabilizing labor market channel. We characterize each channel analytically and find that aggregate demand effects quantitatively prevail in the United States. When feeding in estimated shocks, the model tracks unemployment in the two most recent downturns. We find that extensions lowered unemployment by a maximum of 0.36 pp in the Great Recession, while the joint stabilizing effect of extensions and benefit compensation peaked at 1.12 pp in the pandemic. (JEL E24, E32, E43, E52, J64, J65)

We develop a new method for estimating industry-level and aggregate total factor productivity (TFP) growth. Our method accounts for profits and adjustment costs, and uses firm surveys to proxy for changes in factor utilization. Using it to compute TFP growth rates in the United States and in five European countries since the early 1990s, we obtain results that substantially differ from the ones obtained with standard methods (i.e., Solow growth accounting and the utilization-adjusted method of Basu, Fernald, and Kimball, 2006). In every European country, our TFP series is less volatile and less cyclical than the standard ones, with striking differences during the Great Recession and Eurozone crisis. In the United States, our method indicates higher TFP growth overall and a more gradual productivity slowdown.

Motivated by the unusual increase in temporary unemployment during the recent recession, this paper develops a quantitative model of unemployment dynamics that distinguishes between temporary and permanent layoffs. We calibrate the model to capture labor market dynamics over the period from 1979 to 2019. We then adapt the full quantitative model to study the effects of the extraordinary increase in temporary layoffs induced by the pandemic. We also use the model to evaluate how the Paycheck Protection Program may have worked to facilitate the return of workers to employment from temporary layoff. We find that, without PPP, unemployment would have been persistently higher: Firms would have recalled far fewer workers from temporary layoff, and more workers on temporary layoff would have drifted into more persistent unemployment. ∗We thank Bob Hall, Philipp Kircher, and Giuseppe Moscarini, as well as participants at various seminars, for many helpful comments. Previously circulated as “A Model of Temporary versus Permanent Layoffs over the Business Cycle: with an Application to the Covid-19 Crisis.” †New York University and NBER ‡Cornell University §Bocconi University, CEPR and IGIER

Motivated by the unusual increase in temporary unemployment during the recent recession, this paper develops a quantitative model of unemployment dynamics that distinguishes between temporary and permanent layoffs. We calibrate the model to capture labor market dynamics over the period from 1979 to 2019. We then adapt the full quantitative model to study the effects of the extraordinary increase in temporary layoffs induced by the pandemic. We also use the model to evaluate how the Paycheck Protection Program may have worked to facilitate the return of workers from temporary layoff. We find that, without PPP, unemployment would have been persistently higher: Firms would have recalled far fewer workers from temporary unemployment, and more workers on temporary layoff would have drifted to permanent unemployment. ∗We thank seminar participants at Northwestern. †New York University and NBER ‡Cornell University §Bocconi University, CEPR and IGIER

We revisit the issue of the high cyclicality of wages of new hires. We show that after controlling for composition effects likely involving procyclical upgrading of job match quality, the wages of new hires are no more cyclical than those of existing workers. The key implication is that the sluggish behaviour of wages for existing workers is a better guide to the cyclicality of the marginal cost of labour than is the high measured cyclicality of new hires wages unadjusted for composition effects. Key to our identification is distinguishing between new hires from unemployment versus those who are job changers. We argue that to a reasonable approximation, the wages of the former provide a composition-free estimate of the wage flexibility, while the same is not true for the latter. We then develop a quantitative general equilibrium model with sticky wages via staggered contracting, on-the-job search, and heterogeneous match quality, and show that it can account for both the panel data evidence and aggregate evidence on labour market volatility.

Standard growth accounting measures of Total Factor Productivity (TFP) growth do not take into account changes in factor utilization. Currently, the leading way to deal with this problem, introduced by Basu, Fernald and Kimball (2006), is to use changes in hours per worker as a proxy for unobserved changes in factor utilization. In this paper, we show that this proxy is problematic for a range of European countries. We propose using an alternative proxy, based on surveys of firm capacity utilization. We show that this yields new insights on TFP growth in the Great Recession, especially in Southern Europe.

Using US annual data spanning four decades and several business cycles, we show that that job flow rates of young firms are more cyclical than those of mature firms and detect no difference between the cyclicality of job flow rates of small and large firms. Further, we find that job flow rates due to contractions and expansions of continuing establishments are more cyclical than those due to entry and exit. At the same time the job flow rates of mature firms provide a larger contribution to the overall variability of aggregate job flow rates with respect to those of young firms. The reason is that mature firms employ the vast majority of US workers, and the fraction of aggregate variability of aggregate job flows explained by the job flow of firms belonging to a specific category is proportional to the category's employment share. On the contrary, there is no relevant difference in the contribution to aggregate fluctuations between the job flow rates of firms of different sizes. Our findings hold independently of whether we focus simply on the Great Recession period or on the full sample.

We construct a model of a monetary union to study fiscal consolidation in the Periphery of the euro area, through cuts in public sector wages or hiring when the nominal interest rate is constrained at its lower bound. Consolidation induces a positive wealth effect that increases demand, as well as a reallocation of workers towards the private sector, which together boost private activity. However, in a low inflation environment, demand is suppressed and the private sector is not able to absorb the additional workers. Comparing the two instruments, cuts in public hiring increase unemployment persistently in this environment, while wage cuts reduce it. Regions with higher mobility of labour between the two sectors are able to consolidate more effectively. Price flexibility is also key at the zero lower bound: for a higher degree of price rigidity in the Periphery, consolidation becomes harder to achieve. Consolidations can be self-defeating when the public good is productive, or a complement to private consumption.

Standard growth accounting measures of Total Factor Productivity (TFP) growth do not take into account changes in factor utilization. Currently, the leading way to deal with this problem, introduced by Basu, Fernald and Kimball (2006), is to use changes in hours per worker as a proxy for unobserved changes in factor utilization. In this paper, we show that this proxy is problematic for a range of European countries. We propose using an alternative proxy, based on surveys of firm capacity utilization. We show that this yields new insights on TFP growth in the Great Recession, especially in Southern Europe. ∗We thank John Earle, Thomas Le Barbanchon and seminar participants at Bocconi for useful comments. We are grateful to Kimberly Bayard, Aaron Flaaen, Norman Morin and Justin Pierce from the Federal Reserve Board for their help with the US capacity utilization data, and to Klaas de Vries from the Conference Board for his help with the EU KLEMS data. †Dartmouth and CEPR. ‡Bocconi University. §Bocconi University and IGIER. ¶Bocconi University, IGIER and CEPR.

We use an estimated monetary business cycle model with search and matching frictions in the labor market and nominal price and wage rigidities to study four countries (the U.S., the U.K., Sweden, and Germany) during the financial crisis and the Great Recession. We estimate the model over the period prior to the financial crisis and use the model to interpret movements in GDP, unemployment, vacancies, and wages in the period from 2007 until 2011. We show that contractionary financial factors and reduced efficiency in labor market matching were largely responsible for the experience in the U.S. Financial factors were also important in the U.K., but less so in Sweden and Germany. Reduced matching effi ciency was considerably less important in the U.K. and Sweden than in the U.S., but matching efficiency improved in Germany, helping to keep unemployment low. A counterfactual experiment suggests that unemployment in Germany would have been substantially higher if the German labor market had been more similar to that in the U.S.

We use an estimated monetary business cycle model with search and matching frictions in the labor market and nominal price and wage rigidities to study three countries (the U.S., the U.K., and Sweden) during the financial crisis and the Great Recession. We estimate the model over the period prior to the financial crisis and use the model to interpret movements in GDP, unemployment and vacancies in the period from 2007 until 2011. We show that contractionary financial factors and reduced efficiency in labor market matching were largely responsible for the experience in the U.S. Financial factors were also important in the U.K. and (to a lesser extent) in Sweden, while reduced matching efficiency was considerably less important in the European countries than in the U.S.

Written for the November 2009 Carnegie Rochester Conference "Fiscal Policy in an Era of Unprecedented Budget Deficits". This paper was produced as part of the project Growth and Sustainability Policies for Europe (GRASP), a Collaborative Project funded by the European Commission's Seventh Research Framework Programme, Contract number 244725.We thank Andy Abel, Monika Merz (our discussant), the conference participants, and participants to seminars at Humboldt Berlin, London School of Economics and Université Catholique de Louvain la Neuve for very useful comments. All errors our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

espanolEn este trabajo estimamos el efecto de los cambios exogenos en los impuestos sobre la tasa de desempleo de EE.UU. y en varias otras variables del mercado laboral. Nuestras estimaciones se basan en una version revisada del registro narrativo Romer y Romer (2010) de innovaciones tributarias exogenas, con el aporte adicional de distinguir entre las rentas del capital y los impuestos sobre las rentas del trabajo. En primer lugar, mostramos que la contabilizacion de la diferencia entre los cambios fiscales automaticos y discrecionales en la especificacion revisada es crucial para obtener una medida objetiva de los multiplicadores fiscales. Luego, obtenemos los siguientes resultados principales. Un aumento de la recaudacion tributaria de uno por ciento del PIB tiene un impacto considerable positivo en la tasa de desempleo, y un impacto negativo sobre las horas trabajadas, opresion en el mercado de trabajo y en la probabilidad de encontrar trabajo. El efecto sobre el PIB tambien es importante, pero dentro del rango medio de otros valores que se encuentran en la literatura, debido al hecho que representa la diferencia entre los cambios discrecionales y automaticas de los ingresos fiscales. El efecto sobre la tasa de desempleo de las variaciones en los impuestos corporativos es mayor que el de los impuestos sobre la renta personal. Sugerimos que el ultimo resultado plantea retos interesantes para futuras investigaciones. EnglishWe estimate the effect of exogenous changes in taxes on the US unemployment rate and on several other labor market variables. Our estimates are based on a revised version of the Romer and Romer (2010) narrative record of exogenous tax innovations, with the additional benefit of distinguishing between capital income and labor income taxes. We first show that accounting for the difference between automatic and discretionary tax changes in the revised specification is crucial in order to obtain an unbiased measure of the tax multipliers. We then obtain the following main results. An increase in tax receipts of one percent of GDP has a sizeable positive impact on the unemployment rate, and a negative impact on hours worked, labor market tightness and job finding probability. The effect on GDP is also sizeable, but somewhat in the mid range of other values found in the literature, due to the fact that we account for the difference between discretionary and automatic changes in tax revenues. The effect on the unemployment rate of variations in business taxes is larger than that of personal income taxes. We suggest that the latter result poses interesting challenges for future research.

We use a standard quantitative business cycle model with nominal price and wage rigidities to estimate two measures of economic inefficiency in recent U.S. data: the output gap: the gap between the actual and efficient levels of output -- and the labor wedge -- the wedge between households' marginal rate of substitution and firms' marginal product of labor. We establish three results. (i ) The output gap and the labor wedge are closely related, suggesting that most inefficiencies in output are due to the inefficient allocation of labor. (ii ) The estimates are sensitive to the structural interpretation of shocks to the labor market, which is ambiguous in the model. (iii ) Movements in hours worked are essentially exogenous, directly driven by labor market shocks, whereas wage rigidities generate a markup of the real wage over the marginal rate of substitution that is acyclical. We conclude that the model fails in two important respects: it does not give clear guidance concerning the efficiency of business cycle fluctuations, and it provides an unsatisfactory explanation of labor market and business cycle dynamics.