Unemployment Insurance during a Pandemic

August 11, 2020
By Lei Fang, Jun Nie and Zoe Xie

Research Working PaperRecent expansions of unemployment insurance could raise unemployment by 3.7 percentage points but reduce cumulative deaths by 4.7 percent.

The CARES Act implemented in response to the COVID-19 crisis dramatically increased the generosity of unemployment insurance (UI) benefits, triggering concerns about substantial effects on unemployment. This paper combines a labor market search-matching model with the SIR-type infection dynamics to study the effects of the CARES Act UI on both unemployment and infection. More generous UI policies create work disincentives and lead to higher unemployment but 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 over 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 non-workers, both young and old.

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RWP 20-07, August 2020

JEL Classification: J64, J65, E24

Article Citation

  • Fang, Lei, Jun Nie, and Zoe Xie. 2020. “Unemployment Insurance during a Pandemic.” Federal Reserve Bank of Kansas City, Research Working Paper no. 20-07, August. Available at https://doi.org/10.18651/RWP2020-07

Related Research

  • Fang, Lei, and Jun Nie. 2013. “Human Capital Dynamics and the U.S. Labor Market.” Federal Reserve Bank of Kansas City, Research Working Paper no. 13-10.
  • Pei, Yun, and Zoe Xie. 2020. “A Quantitative Theory of Time-Consistent Unemployment Insurance.” Journal of Monetary Economics, forthcoming. Available at https://doi.org/10.1016/j.jmoneco.2020.06.003
  • Nakajima, Makoto. 2012. “A Quantitative Analysis of Unemployment Benefit Extensions.” Journal of Monetary Economics, vol. 59, pp. 686–702. Available at https://doi.org/10.1016/j.jmoneco.2012.09.005