Unemployment Insurance during a Pandemic

Lei Fang, Jun Nie, and Zoe Xie
Working Paper 2020-13
July 2020

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Abstract: The CARES Act implemented in response to the COVID-19 crisis dramatically increases the generosity of unemployment insurance (UI) benefits, triggering concerns about its substantial impact on unemployment. This paper combines a labor market search-matching model with the SIR-type infection dynamics to study the effects of CARES UI on both unemployment and infection. More generous UI policies create work disincentives and lead to higher unemployment, but they also reduce infection and save lives. Economic shutdown policies further amplify these effects of UI policies. Quantitatively, the CARES UI policies raise unemployment by an average of 3.7 percentage points over April to December 2020 but also reduce cumulative death by 4.7 percent. Eligibility expansion and the extra $600 increase in benefit level account for more than 90 percent of the total effects, while the 13-week benefit duration extension plays a much smaller role. Overall, UI policies improve the welfare of workers and reduce the welfare of nonworkers, both young and old.

JEL classification: J64, J65, E24

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

https://doi.org/10.29338/wp2020-13Off-site link

The authors thank Oske Yang for excellent research assistance. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Kansas City, 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 Street NE, Atlanta, GA 30309, leifang@gmail.com; Jun Nie, Research Department, Federal Reserve Bank of Kansas City, 1 Memorial Drive, Kansas City, MO 64198, niejun329@gmail.com; or Zoe Xie, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309, xiexx196@gmail.com.

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