DP18135 Labour Market Reallocation Effects of COVID-19 Policies in Spain: A Tale of two Recessions

• Antonia Díaz Juan J Dolado Alvaro Jañez Felix Wellschmied
4 May 2023

This paper studies short-time work arrangements (ERTEs) when aggregate risk is partially sector-specific. In Spain, the Great Recession and the pandemic recession (aka the Great Contagion)
can both be understood as being driven partially by large sector-specific shocks. However, the latter shows much less labor reallocation because ERTEs were available to firms. We show
that ERTEs stabilize unemployment rates by allowing workers to remain with their employers in highly affected sectors. However, they crowd-out labor hoarding of employers, increase the
volatility of the rate of people working and, consequently, of output, and slowdown worker reallocation away from the sectors badly hit by the recession.