Unemployment Insurance during a Pandemic

Lei Fang, Jun Nie, and Zoe Xie
Working Paper 2020-13b
July 2020 (revised June 2021)

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Abstract: We combine a labor market search-matching model with the SIR-type infection dynamics to study the effects of CARES Act unemployment insurance (UI) on unemployment and infection during the COVID19 pandemic. More generous UI policies lead to higher unemployment but save lives by reducing infections at workplaces. Shutdown policies and infection risk further amplify the UI effects. Quantitatively, the CARES UI policy raises average unemployment by 3.8 percentage points out of a total increase of 11 percentage points over April to December 2020 and reduces cumulative deaths by 4.9 percent. Decomposing the total effect into contributions by the three CARES UI components, we find quantitatively important interaction effects among the components. In a model extension where workers may be temporarily laid off and recalled to their old jobs, the CARES UI policy raises average unemployment by 3.2 percentage points and lowers cumulative deaths by 4 percent.

JEL classification: J64, J65, E24

Key words: COVID-19, CARES Act, unemployment insurance, search and matching

https://doi.org/10.29338/wp2020-13b


First draft: July 30, 2020. The authors thank seminar participants at the Atlanta Fed brown bag luncheons, University of Nebraska Omaha, Texas A&M University, New Hampshire University, Virtual East Asia Macroeconomics Seminar Series, Clemson University, and Indiana University for comments. The authors are especially grateful to Toni Braun, Andy Glover, Federico Mandelmann, and Juan Rubio-Ramirez for suggestions. They thank Oske Yang for excellent assistance on the CPS data. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Lei Fang, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree St. NE, Atlanta, GA 30309; Jun Nie, Research Department, Federal Reserve Bank of Kansas City, 1 Memorial Drive, Kansas City, MO 64198; or Zoe Xie, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree St. NE, Atlanta, GA 30309.

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