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Should wages be subsidized in a pandemic?
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- Journal:
- Macroeconomic Dynamics / Volume 27 / Issue 6 / September 2023
- Published online by Cambridge University Press:
- 25 July 2022, pp. 1549-1580
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- Article
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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
$\%$ of 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.
