The Macroeconomic Consequences of Unemployment Scarring  (link)

Presented at: CEF 2024, IAAE 2024, JHU Macro Seminar

Job loss leaves scars on wages that persist for more than 20 years. Yet, the importance of this well-documented micro fact for macro dynamics remains largely unexplored. This paper argues that these scars are a key determinant of the speed of macroeconomic recovery following recessions. I incorporate human capital into a heterogeneous agent New Keynesian (HANK) model with search and matching frictions. During unemployment, human capital depreciates, leading to lower wages for reemployed workers. Unemployment scarring, mediated by the fraction of temporary versus permanent layoffs, enables the model to capture both the sluggish recovery from the Great Recession and the rapid rebound from the COVID Recession. In particular, the presence of scarring reveals the pivotal role that temporary layoffs fulfilled in supporting the swift post-pandemic recovery and in preventing a subsequent permanent rise in inequality. In a counterfactual analysis of the Great Recession, a U.S. fiscal consolidation would have proven substantially less effective at reducing debt-to-GDP as scarring erodes future tax revenues and therefore increases pressure on the fiscal deficit.

Welfare and Spending Effects of Consumption Stimulus Policies (link)

(with Christopher Carroll, Edmund Crawley, Ivan Frankovic, and Hakon Tretvoll)

Conditionally accepted at Quantitative Economics

Using a heterogeneous agent model calibrated to match measured spending dynamics over four years following an income shock (Fagereng, Holm, and Natvik (2021), we assess the effectiveness of three fiscal stimulus policies employed during recent recessions. Unemployment insurance (UI) extensions are the clear “bang for the buck” winner when effectiveness is measured in utility terms. Stimulus checks are second best and have two advantages (over UI): they arrive and are spent faster, and they are scalable to any desired size. A temporary (two-year) cut in the rate of wage taxation is considerably less effective than the other policies and has negligible effects in the version of our model without a multiplier.

Perceived Unemployment Risks Over the Business Cycle (link)

(with Adrian Monninger, Xincheng Qiu, and Tao Wang)

We backcast expectations on job finding and job loss in the Survey of Consumer Expectations to 1978. We document that job finding expectations are highly predictive of the true job finding probability while expectations of job loss are sticky. We reveal substantial heterogeneity in these expectations across observable and unobservable dimensions. Both information rigidity and risk heterogeneity play a substantial role in explaining households’ perceptions of unemployment risk. We calibrate these facts to a heterogeneous agent consumption saving model with unemployment to quantify the precautionary saving over the business cycle.