Labor market policies during an epidemic

Abstract

We study the positive and normative implications of labor market policies that counteract the economic fallout from containment measures during an epidemic. We incorporate a standard epidemiological model into an equilibrium search model of the labor market to compare unemployment insurance (UI) expansions and payroll subsidies. In isolation, payroll subsidies that preserve match capital and enable a swift economic recovery are preferred over a cost-equivalent UI expansion. When considered jointly, however, a cost-equivalent optimal mix allocates 20 percent of the budget to payroll subsidies and 80 percent to UI. The two policies are complementary, catering to different rungs of the productivity ladder. The small share of payroll subsidies is sufficient to preserve high-productivity jobs, but it leaves room for social assistance to workers who face inevitable job loss.

Unemployment claims during COVID-19 and economic support measures in the U.S.

“… Bhutta et al (2020) show that, without the CARES act stimulus, nearly 50 percent of the households that entered in unemployment would have not been able to cover their basic expenses, whilst Altonji et al (2020) and Boar and Mongey (2020) both find no evidence that the increased unemployment benefits act as anti-motive in returning to the job market at the same wage. The effectiveness of economic stimulus is also backed by the findings of other studies ( Birinci et al, 2021 ; Gourinchas et al, 2021 ; Casado et al, 2020 ).…”

Optimal Unemployment Benefits in the Pandemic

“…We have focused on the amount and timing of unemployment benefits, and thus abstracted from two other important aspects of the current crisis: the distinction between temporary and permanent separations, as examined in Gregory et al (2020) and Birinci et al (2020); and the epidemiological side of the discussion, as applied to a search model by e.g. Kapicka and Rupert (2020).…”

Whether, When and How to Extend Unemployment Benefits: Theory and Application to COVID-19

“…Our analysis also contributes to understanding the appropriate policy response to the COVID-19 crisis. In this regard, our stylized framework complements the growing literature incorporating the more unique features of the pandemic, such as the distinction between temporary and permanent separations (as examined in Gregory et al (2020) and Birinci et al (2020)) and the epidemiological side of the crisis (as applied to a search model by e.g. Kapicka and Rupert (2020), Birinci et al (2020) and Fang et al (2020)).…”

“…In this regard, our stylized framework complements the growing literature incorporating the more unique features of the pandemic, such as the distinction between temporary and permanent separations (as examined in Gregory et al (2020) and Birinci et al (2020)) and the epidemiological side of the crisis (as applied to a search model by e.g. Kapicka and Rupert (2020), Birinci et al (2020) and Fang et al (2020)). The purpose of our paper is less to provide a comprehensive and quantitative analysis of the recent policy response, and more to provide qualitative insights on the key tradeoffs involved.…”