Labor market policies during a pandemic

Many countries have introduced lockdowns to fight Covid-19, which has required the shuttering of many businesses and dramatically increased unemployment. We study the interaction of lockdowns and employment support programs in an epidemiological SEIR model with search and matching frictions in the labor market ala’ Mortensen and Pissarides. Lockdowns reduce the spread of Covid-19 by keeping people at home rather than at work, but increase unemployment and reduce production. Extending or increasing unemployment insurance benefits insures workers who lose their jobs due to the lockdown, but may slow the recovery of labor markets after the pandemic as it takes time for unemployed workers to find new jobs. An alternative policy that replaces the lost revenue of firms who retain their workers on payroll is costlier during the pandemic, but ensures a faster post-COVID recovery. We use our SEIR-MP to predict the long-run labor market performance of different policies and compute optimal policy mixes.