17
The next step is to make use of the estimated equations in a comprehensive aggregate flow
model of the labour market. The objective is to shed light on how a recessionary shock is
propagated.11
4.2 Labour Market Responses to an Adverse Shock
How does permanent and temporary employment respond to a recessionary shock? We use the
model to simulate a recession and compare the outcomes with those implied by a reference case
without a recession. The reference case involves YDEV=0. The effects of the recession are taken
as the differences - either in relative or absolute terms - between the values of the endogenous
variables in the two scenarios. The shock involves a “V-turn” of YDEV that lasts for 5 years,
with a trough after 10 quarters with GDP 3 percent below trend, i.e., YDEV = -0.03. The
downturn takes place gradually to the trough and analogously there is a gradual rise in YDEV
towards the end of the recession after 20 quarters; hence the label “V-turn”. In the graphs that
follow, the hypothetical recession sets in during quarter 7 and has ended by quarter 27.
Figure 4.1 shows the cyclical responses of permanent and temporary employment. When the
recession strikes, there is an initial steep fall in temporary employment. By the trough of the
recession, temporary employment has fallen by more than four percent. From (roughly) the
trough and onwards, temporary employment rises steeply, being four percent above its reference
level by the end of the recession. From this point and onwards, temporary employment gradually
falls back to normal. The evolution of permanent employment is very different. The relative
decline during the downturn is less pronounced compared to the development of temporary
employment. Permanent employment rises near the end of the recession but there is no
“overshooting” relative to the reference level.
11 We have examined how the model performs in dynamic simulations over the sample period. The model tracks the
evolution of stocks and flows reasonably well. For example, unemployment and labour force participation rates are
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