Working Paper: CEPR ID: DP14915
Authors: Kurt Mitman; Stanislav Rabinovich
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 unem- ployment 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.
Keywords: COVID-19; epidemic; unemployment insurance; optimal policy
JEL Codes: J65; H1; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search efficiency (G14) | optimal increase in unemployment benefits (J65) |
| optimal increase in unemployment benefits (J65) | economic recovery (E65) |
| decrease in search efficiency (D61) | optimal increase in unemployment benefits (J65) |
| increase in unemployment benefits (J65) | reduction in welfare (I38) |
| optimal unemployment benefits (J65) | changes in search efficiency (G14) |
| UI extension with reemployment bonus (J65) | enhanced welfare compared to CARES Act (I38) |
| optimal UI response contingent on labor market conditions (J29) | suboptimal high benefits if indexed to unemployment rate (J68) |