Unemployment Insurance during a Pandemic

Lei Fang, Jun Nie, and Zoe Xie
Working Paper 2020-13a
July 2020 (revised September)

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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. Shutdown policies and infection risk further amplify these effects of UI policies. Quantitatively, the CARES UI policies raise average unemployment by 3.8 percentage points out of a total expected increase of 11 percentage points over April to December 2020 but also reduce cumulative deaths by 4.9 percent. Eligibility expansion and the extra $600 increase in benefit levels are both important for the effects.

JEL classification: J64, J65, E24

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

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

The authors thank seminar participants at Federal Reserve brown bag luncheons for comments. They are especially grateful to Toni Braun, Andy Glover, and Juan Rubio-Ramirez for suggestions. They also 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, 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; 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 Street NE, Atlanta, GA 30309.

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