Labor Market Sorting: The Medium-Term Economic Impact of COVID-19

This paper conducts a quantification of economic consequences of COVID-19 crisis for the Luxembourgish economy. We build a general equilibrium model that incorporates firms', goods' and labor markets, as well as interactions across them.
The innovativeness of our theory comes from endogenizing workers' sorting across multiple occupations and sectors. Moreover, we derive closed-form solutions for occupation-specific equilibrium wage distributions, and we numerically compute occupation-sector-specific wage distributions. We find that the COVID-19 shock has a strong distributive effect across sectors and occupations: the self-selection of workers deteriorates in sectors experiencing negative fallout, and vice versa. Over-all, the total GDP and employment are adversely affected, while the inequality in the whole economy and within many sectors increases.