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This paper examines how pandemic-induced layoffs contributed
to post-Covid-19 inflation through their effects on retirement and
labor supply. Using CPS microdata, we show that the unprecedented
“Great Layoff” triggered a sharp rise in early retirements—
the “Great Retirement”—which increased labor market tightness
and nominal wages. Younger non-participants were drawn into
employment, partly offsetting the loss of older workers. To quantify
this mechanism, we estimate a New Keynesian model with
endogenous participation and retirement. Counterfactual simulations
show that the Great Retirement accounted for roughly three
cumulative percentage points of inflation from 2020 to 2024, with
modest GDP effects.
