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.

Dynamic Trade-offs and Labor Supply Under the CARES Act

“…A key theme of this work is that increased unemployment benefits dampen the infection externality associated with workers' labor supply decisions. Birinci, Karahan, Mercan, and See (2020) find that the optimal policy during a pandemic includes both additional UI benefits and payroll subsidies. Gregory, Menzio, and Wiczer (2020) find that short-term lockdowns have long-lasting negative effects on unemployment.…”

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.…”

The Distributional Effects of COVID-19 and Optimal Mitigation Policies

“…(2020) study the SIR model with multiple sectors. Birinci et al (2020), Garibaldi et al (2020), and Kapicka and Rupert (2020) incorporate search and matching frictions into the SIR framework, while Berger et al (2020), Chari et al (2020), and Piguillem and Shi (2020) extend the SIR model to focus on testing and quarantine. Argente et al (2020) and Azzimonti et al (2020) enrich the SIR model with city structure and contact networks, respectively.…”