Labor market effects of COVID-19 shocks

We study the impact of several Covid-19 related supply shocks. We use a standard wage setting-price setting model of the labor market and analyze the transmission of the shocks to the natural rate of unemployment and production. In a first step, the shocks are analyzed in a general way, graphically and algebraically. In a second step, numerical examples illustrate the effects on the real wage and the labor market equilibrium as well as output. Our theoretical results indicate that the negative supply shocks related to the Covid-19 pandemic are associated with a decline in the natural level of output and employment. Our results are supported by empirical evidence across various countries. However, limitations of the theoretical model can be considerable.