Worker Heterogeneity, Selection, and Unemployment Dynamics in a Pandemic

Abstract

AbstractWe employ a new Keynesian model with random search in the labor market and endogenous selection among heterogeneous workers to investigate the impact of a pandemic‐induced recession on the distribution of unemployment across workers. In such a recession, workers whose unemployment spells in normal times are inefficiently frequent and long are disproportionately affected. This remains true even when the pandemic initially causes mass layoffs that affect workers broadly or if many separations represent temporary layoffs. Monetary policy that responds to labor market variables affects unemployment for all workers but does relatively little for the distribution of unemployment across workers types.