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.

A number of authors have argued that the conventional model of unemployment dynamics due to Mortensen and Pissarides has difficulty accounting for the relatively volatile behavior of labor market activity over the business cycle. We address this issue by modifying the Mortensen‐Pissarides framework to allow for staggered multiperiod wage contracting. What emerges is a tractable relation for wage dynamics that is a natural generalization of the period‐by‐period Nash bargaining outcome in the conventional formulation. We then show that a reasonable calibration of the model can account for the cyclical behavior of wages and labor market activity observed in the data.

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.

We study the importance of financial markets for (un)employment fluctuations in a model with matching frictions where firms borrow under limited enforcement. Borrowing affects employment through a ‘debt bargaining channel’: higher debt improves the bargaining position of employers with workers and increases the incentive to hire. We estimate the model structurally and find that the debt bargaining channel accounts for 26 percent of unemployment fluctuations. We find empirical support for the channel at the micro level using firm level data from Compustat.