Optimal unemployment benefits in the pandemic
BibTeX
@article{mitman2020optimal,
title={Optimal unemployment benefits in the pandemic},
author={Mitman, Kurt and Rabinovich, Stanislav},
year={2020},
publisher={CEPR Discussion Paper No. DP14915}
}
Abstract
How should unemployment benefits vary in response to the economic crisis induced by the COVID-19 pandemic? We answer this question by computing the optimal unemployment insurance response to the COVID-induced recession.We compare the optimal policy to the provisions under the CARES Act which substantially expanded unemployment insurance and sparked an ongoing debate over further increases and several alternative scenarios. We find that it is optimal first to raise unemployment benefits but then to begin lowering them as the economy starts to reopen despite unemployment remaining high. We also find that the $600 UI supplement payment implemented under CARES was close to the optimal policy. Extending this UI supplement for another six months would hamper the recovery and reduce welfare. On the other hand, a UI extension combined with a re-employment bonus would further increase welfare compared to CARES alone, with only minimal effects on unemployment.
Notes and Excerpts
Second, we consider a recent proposal to extend the weekly UI supplement, but to have it be implemented additionally as a re-employment bonus that newly hired workers could keep. The motivation behind the policy is to remove the moral hazard distortion from the high effective replacement rates under the CARES supplement. Following the bonus proposal being considered. we assume that from August 1, 2020 through December 31, 2020 unemployed individuals receive a weekly $450 supplement. Newly hired workers during this time period keep receiving the $450 supplement in addition to their weekly wage.
Hrm. I wonder if PUI might be doing something similar to that. Bu the monthly transition rate from U to P remains depressed throughout the pandemic, with only a tiny spike around the middle of the 600 dollar bonus period. (Based on my calculations from the CPS.) So for this story to hold, the duration of that P spells would need to be like a week, tops.
They also make the point that expectations about weak labor markets in the future can mitigate moral hazard today:
in the more pessimistic baseline scenario, the more sluggish recovery makes households more willing to accept jobs even if the replacement rate is higher than the wage, because they are afraid of being unemployed after the supplement runs out, when it’s still costly to find a job