The impact of the COVID‐19 pandemic on high‐skilled and low‐skilled labor markets in a DSGE model

Abstract

AbstractThis research analyzes the unequal impact of COVID‐19 on high‐skilled and low‐skilled labor in a dynamic stochastic general equilibrium (DSGE) model. The model is calibrated to fit Taiwan's economy and evaluates the effectiveness of various fiscal measures, including an increase in government spending, an increase in lump‐sum transfers, a disbursement of consumption vouchers, and an income tax cut, for combating the pandemic recession. Our results indicate that low‐skilled households tend to hoard labor more than high‐skilled households during economic downturns. An income tax cut outperforms other fiscal instruments in generating the highest aggregate welfare and in advancing output, employment, and consumption.