Temporary Layoffs, Firm Entry and Exit Dynamics, and Aggregate Fluctuations
Year: 2025
Type: article
Abstract: We study how the countercyclicality of temporary layoffs affects aggregate unemployment fluctuations, firm entry and exit dynamics, and macroeconomic fluctuations by building a tractable framework with equilibrium unemployment and endogenous firm entry and exit where firms have a choice over temporary layoffs and recalls from temporary layoff. The model can quantitatively generate the rich cyclical dynamics of temporary layoffs and recalls from temporary layoff, job vacancies, aggregate unemployment, and firm entry and firm survival in U.S. data, including the strong countercyclicality of temporary layoffs. We show that this cyclicality, which hinges on the presence of costs associated with worker recruiting, plays a key role in limiting the contraction in job creation and employment as well as the rise in aggregate unemployment during recessions. Moreover, amid factual acyclical wage dynamics, the countercyclical buffer effect stemming from temporary layoffs extends beyond the labor market and contributes to shallower contractions in the number of firms and in GDP. Despite their stabilizing force during downturns, temporary layoffs have little influence on the pace of employment and output recoveries.
DOI: 10.1257/mac.20230217
Authors: Sanjay K. Chugh, Alan Finkelstein Shapiro
Institutions: The Ohio State University, Tufts University
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7083688039