Curtailment of Economic Activity and Labor Inequalities

The worrying combination of the labor market tightness and the wage inflation in the US since the pandemic raises a question on how the business closure orders affected the fragile segments of the labor force and contributed to mounting inflationary wage pressure. We develop a macroeconomic model with heterogeneous labor and a nested CES production function. We estimate the model using the newly collected data from the CPS and the BEA. The recent crisis leads to a contraction in total hours worked, makes wages more volatile, and sustains wage inflation. The model also generates differential effects of the business closure orders on productivity and the labor market in the US. The earning rates and hours responses to the crisis differ by age, skills, and origin of the worker.