Should wages be subsidized in a pandemic?

Brant Abbott and Nam Phan ()

No 1486, Working Paper from Economics Department, Queen's University

Abstract: We use a labor search model with heterogenous households and firms to study the efficacy of a wage subsidy during a pandemic, relative to enhancing unemployment benefits. A large proportion of the economy is forced to shut down, and firms in that sector choose whether to lay off workers or keep them on payroll. A wage subsidy encourages firms to keep workers on payroll, which speeds up labor market recovery after the pandemic ends. However, a wage subsidy can be costlier than enhancing unemployment benefits. If the shutdown is long or profit margins are low then a wage subsidy is preferable, and vice-versa. The optimal mixture of policies includes a wage subsidy that covers 90% the first $200/week of earnings, and expands unemployment benefits to cover all salary up to $275/week. Low income workers, as well as those in less productive jobs, benefit the most from a wage subsidy.

Keywords: wage subsidy; unemployment insurance; search; pandemic; Covid-19 (search for similar items in EconPapers)
JEL-codes: E2 E32 J40 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2022-05
New Economics Papers: this item is included in nep-dge, nep-ias, nep-lma and nep-mac
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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/wpaper/qed_wp_1486.pdf First version 2022 (application/pdf)

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Journal Article: Should wages be subsidized in a pandemic? (2023)
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