Temporary Layoffs, Firm Entry and Exit Dynamics, and Aggregate Fluctuations

We build a model to study how the countercyclicality of temporary layoffs affects unemployment, firm entry and exit, and macroeconomic fluctuations. The model can quantitatively generate the rich cyclical dynamics of temporary layoffs, unemployment, and firms in US data. The cyclicality of temporary layoffs plays a key role in limiting the contraction in job creation and the rise in unemployment during recessions. Amid factual wage dynamics, the countercyclical buffer from temporary layoffs extends beyond the labor market and contributes to shallower contractions in the number of firms and GDP, but has little influence on the pace of recoveries. (JEL E23, E24, E32, J23, J63)