Template-Type: ReDIF-Paper 1.0
Author-Name: Joaquín García-Cabo
Author-X-Name-First: Joaquín
Author-X-Name-Last: García-Cabo
Author-Name: Joaquín Anna Lipińska
Author-X-Name-First: Anna
Author-X-Name-Last: Lipińska
Author-Name: Gastón Navarro
Author-X-Name-First: Gastón
Author-X-Name-Last: Navarro
Title: Sectoral shocks, reallocation, and labor market policies
Abstract: Unemployment insurance and wage subsidies are key tools to support labor markets in recessions. We develop a multi-sector search and matching model with on-the-job human capital accumulation to study labor market policy responses to sector-specific shocks. Our calibration accounts for structural differences in labor markets between the United States and the euro area, including a lower job-finding rate in the latter. We use the model to evaluate unemployment insurance and wage subsidy policies in recessions of different duration. After a temporary sector-specific shock, unemployment insurance improves reallocation toward productive sectors at the cost of initially higher unemployment and, thus, human capital destruction. By contrast, wage subsidies reduce unemployment and preserve human capital at the cost of limiting reallocation. In the United States, unemployment insurance is preferred to wage subsidies when it does not distort job creation for too long. In the euro area, wage subsidies are preferred, given the lower job-finding rate and reallocation.
Creation-Date: 2023-04
File-URL: https://www.bis.org/publ/work1095.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1095.htm
File-Format: text/html
Number: 1095
Keywords: labor market policies, search and matching frictions, reallocation
Classification-JEL: E24, J64, J68
Handle: RePEc:bis:biswps:1095