The impact of COVID-19 on unemployment and earnings inequality

The UK Government has recently announced a set of policies to encourage individuals to retrain and reallocate away from sectors hard-hit by the COVID19 pandemic. Evidence shows, however, that the degree of occupational/industry mobility falls during recessions (see e.g. Carrillo-Tudela, Hobijn, She and Visschers, European Economic Review, 2016). This cast doubts on whether individuals will actually be willing and/or able to change occupations in this difficult time. Our project therefore evaluates how effective different labour market policies are at reducing the impact of the pandemic on unemployment and earnings inequality. We will first document how individuals search for jobs across occupations/industries. For this purpose, we will use newly collected longitudinal data on job search available through the Understanding Society COVID19 study. Informed by these data, we will develop and structurally estimate multi-sector business cycle models with heterogenous agents in which workers' occupation/industry mobility decisions trade off idiosyncratic career prospects against the relative abundance of vacancies across sectors. This framework will allow us to quantify the effectiveness of e.g. job seekers assistance, re-training and job retention schemes on unemployment and inequality through their effects on workers' reallocation and firms' layoff and job creation decisions. To showcase our findings, in addition to academic articles we will make freely available an "unemployment and inequality calculator". This will provide the likely evolution of unemployment and earnings inequality under different simulated policy regimes. Users will be able to evaluate a combination of these policies by simply changing the parameters that describe them in the models.