Skill loss during unemployment and the scarring effects of the COVID-19 pandemic

We integrate the SIR epidemiology model into a search and matching framework with skill loss during unemployment. As infections spread, fewer jobs are created, skills deteriorate and TFP declines. The equilibrium is not efficient due to infection and skill composition externalities. Job creation increases infections due to increased interactions among workers. However, lower job creation decreases TFP due to skill loss. A pandemic causes the unemployment rate to increase by 13.4 percentage points and TFP to decline by 0.61%, i.e. nearly 54% of productivity losses in past recessions. We study the efficient allocation given the trade-off between both externalities and show that quantitatively the skill composition externality is sizable.