Research

Monetary policy is typically understood to affect employment through labor demand, with the role of labor supply receiving less consideration. We estimate the response of labor market flows to high-frequency changes in interest rates around FOMC announcements and Fed Chair speeches, and find that a contractionary monetary policy shock leads to a significant increase in labor supply: workers reduce the rate at which they quit jobs to nonemployment, and non-employed individuals increase their job-seeking behavior. These effects are quantitatively important: holding supply-driven labor market flows constant, the decline in employment from a contractionary monetary policy shock would be twice as large. To interpret our findings, we estimate a heterogeneous agent model with frictional labor markets and an active extensive margin of labor supply. The model rationalizes existing estimates of modest labor supply responses to idiosyncratic transfers with our new evidence of a large labor supply response to an aggregate shock.

We revisit the role of temporary layoffs in the business cycle. While many 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 recessionary 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.

This paper documents that the earnings cost of job loss is concentrated among workers who find reemployment in lower-skill occupations, and that the cost and incidence of such occupation displacement is higher for workers who lose their job during a recession. I propose a model where hiring is endogenously more selective during recessions, leading some unemployed workers to optimally search for reemployment in lower-skill jobs. The model accounts for existing estimates of the size and cyclicality of the present value cost of job loss, and the cost of entering the labor market during a recession.

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 behavior of wages for existing workers is a better guide to the cyclicality of the marginal cost of labor 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 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 labor market volatility.

We document that the job-finding premium for non-employed active searchers relative to comparable nonparticipants is surprisingly small, strongly procyclical, and declining in the aggregate quantity of active search. This pattern does not support the standard assumption of perfect substitutability between active and passive search; it instead identifies a crowding-out of active search—the relative return to search effort falls as aggregate search effort rises. We develop a matching framework in which the elasticity of substitution is estimated from the premium’s response to the extensive and intensive margins of active search. At the estimated elasticity, aggregate search effort responds less to an economy-wide change in unemployment insurance benefits than micro-data estimates would imply. We formulate sufficient statistics for the extent of crowding-out, characterize its implications for unemployment insurance within a standard Baily–Chetty formula, and quantify the mechanism in an equilibrium business-cycle model.