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We build a model to study how the countercyclicality of temporary layoffs affects unemployment, firm entry and exit dynamics, and macroeconomic fluctuations. Calibrating the model to U.S. data, we show that countercyclical temporary layoffs limit the contraction in job creation and the rise in unemployment during recessions. Moreover, this buffer effect also limits the depth of contractions in the number of firms and GDP. The interaction between temporary layoffs and firm exit shapes the magnitude of the buffer effect. Countercyclical temporary layoffs limit the magnitude of contractions but have little influence on the pace of recoveries.
