One feature that distinguishes the COVID-19 recession from the Great Recession, according to Chicago Booth’s Matthew J. Notowidigdo, is that a huge portion of the job losses in the current crisis have been temporary layoffs—the unemployed workers expect to end up back at their former employer sooner or later. But how many of those temporary layoffs turn into permanent ones? Notowidigdo finds that laid-off workers have been returning to work at a very high rate, thereby avoiding the damaging effects of long-term unemployment that plagued so many during the last recession.
We were motivated by our own research on the Great Recession, and in the work on the Great Recession, what we found was that there was this hysteresis effect of long-term unemployment: the longer people were out of work, the harder it was for them to find a job.
So when the Great Recession first hit, there was this big increase in unemployment. People were out of work a long time, and then they ended up having a harder time getting back to work. And so, we wanted to see, can we tell that same story about what’s happening in the COVID-19 recession?
Specifically, our idea was: there’s this big shock to unemployment when everything shuts down, those workers then may be out of work a long time, and are they going to find a more difficult time getting back to work? And is that going to prolong the recession much longer than you might’ve expected? The COVID-19 recession has already started out as a very unusual recession, and what we saw when we started looking at the data in the COVID-19 recession is that there was a huge increase in unemployment, but the job-finding rates—the rate at which unemployed workers ended up back in work—that still remained very high. And so, the puzzle that we were trying to understand in the paper is how to understand why that was happening in the first few months of the COVID-19 recession, and what that might tell us about what the next several months are going to look like in terms of the speed of the recovery.
And one of the things we found was that the headline unemployment rate that you see in the monthly job reports turns out to be very misleading during the COVID-19 recession. And one reason for that is that a very large number of the people who are unemployed are on temporary layoff. And what I mean by that is that they expect that eventually they’re going to return to their former employer. They’re going to get called back to work when conditions improve. And what that means is that they’re not actually searching for work, as is typically the case for an unemployed worker. They’re actually waiting. They’re waiting to get called back. They’re not actively searching. And once they get called back, then they leave the unemployed pool and they end up back at their former job.
Our idea that we had in this research that we wanted to test was, well, suppose that some of those workers that are on temporary layoff, they ended up not getting called back. They end up on permanent layoff, and they might end up having to search for a new job. And we wanted to understand: How could that prolong the COVID-19 recession and lead to a slower recovery in the overall unemployment rate? And what we found in our research—actually a little bit, I think, to all of our surprise—was that this idea that temporary workers end up on permanent layoff and then end up taking a long time to find a job, we actually aren’t seeing any evidence of that happening in the labor market right now. People that are on temporary layoff are still finding jobs very rapidly and they’re not ending up transitioning to permanent layoff at the rate we expected. And so, so far the COVID-19 recession looks very different than the Great Recession because in the Great Recession we saw prolonged low reemployment rates, and so far we see pretty high job-finding rates for the workers that are unemployed right now.
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