Staff Reports
Labor Market Policies during an Epidemic
Number 943
October 2020

JEL classification: E24, E62, J64

Authors: Serdar Birinci, Fatih Karahan, Yusuf Mercan, and Kurt See

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.

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Author Disclosure Statement(s)
Serdar Birinci
For the research that resulted in “Labor Market Policies During an Epidemic,” I attest to the following:
1. Financial support for my research came entirely from my employer, the Federal Reserve Bank of Saint Louis.
2. I have not received any financial or in-kind support for this research from anyone other than the entities listed above.
3. I have no paid or unpaid positions as officer, director, or board member of any relevant non-profit organizations or profit-making entities.
4. I have no close relative or partners who received financial support from or work in any position at any relevant entity.

Fatih Karahan
For the research that resulted in “Labor Market Policies During an Epidemic,” I attest to the following:
1. Financial support for my research came entirely from my employer, the Federal Reserve Bank of New York.
2. I have not received any financial or in-kind support for this research from anyone other than the entities listed above.
3. I have no paid or unpaid positions as officer, director, or board member of any relevant non-profit organizations or profit-making entities.
4. I have no close relative or partners who received financial support from or work in any position at any relevant entity.

Yusuf Mercan
For the research that resulted in “Labor Market Policies During an Epidemic,” I attest to the following:
1. Financial support for my research came entirely from my employer, the University of Melbourne.
2. I have not received any financial or in-kind support for this research from anyone other than the entities listed above.
3. I have no paid or unpaid positions as officer, director, or board member of any relevant non-profit organizations or profit-making entities.
4. I have no close relative or partners who received financial support from or work in any position at any relevant entity.

Kurt Gerrard See
For the research that resulted in “Labor Market Policies During an Epidemic,” I attest to the following:
1. Financial support for my research came entirely from my employer, the Bank of Canada.
2. I have not received any financial or in-kind support for this research from anyone other than the entities listed above.
3. I have no paid or unpaid positions as officer, director, or board member of any relevant non-profit organizations or profit-making entities.
4. I have no close relative or partners who received financial support from or work in any position at any relevant entity.

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