Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/281090 
Year of Publication: 
2022
Series/Report no.: 
Queen’s Economics Department Working Paper No. 1486
Publisher: 
Queen's University, Department of Economics, Kingston (Ontario)
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.
Subjects: 
wage subsidy
unemployment insurance
search
pandemic
Covid-19
JEL: 
E2
E32
J40
Document Type: 
Working Paper

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