Research on COVID-19
The Corona pandemic has changed the world as we know it. At the IIES several researchers are working intensely on understanding the virus, and its effects on society.
Large temporary increase in unemployment insurance optimal response to COVID-like recession
New research from IIES Associate Professor, Kurt Mitman, and co-author, Assistant Professor Stanislav Rabinovich (UNC Chapel Hill) investigates whether, when and how to extend unemployment insurance (UI) in recessions. Some broad findings suggest that expectations matter and that a large temporary increase in UI is the optimal response to a COVID-like recession.
In designing UI, policymakers face the classic insurance-incentive tradeoff. This tradeoff is complicated because unemployed worker’s job search behavior changes with both current and future UI benefits (and economic conditions).
The research provides a dynamic generalization of Baily-Chetty, whereby optimal policy balances the consumption smoothing benefit of UI against its moral hazard cost. The analysis yields three broad insights:
1) Moral hazard cost depends most directly on search efficiency, not on the unemployment rate. Thus, if possible, UI would be indexed to the primitive shocks, not the unemployment rate.
2) The dynamic nature of the environment complicates the standard Baily-Chetty formula because future UI distort current search efforts, hence have a moral hazard cost today. The optimal policy under commitment accounts for this. The optimal policy under discretion does not: it effectively follows a sequence of static Baily-Chetty formulas.
3) The level of unemployment doesn't matter per se, but its level over time does. For example: imagine that unemployment is high today but expected to be low in the future. Under commitment, promising to cut UI when unemployment is low is a cheap way to provide incentives when unemployment is high.
How does this apply to a COVID-like shock?
With commitment (Ramsey), a large but short-lived increase in benefits is optimal. Without commitment, the government can't commit to lowering future UI, thus it cannot provide as much insurance today, so implements a smaller more persistent increase.
How can the Ramsey policy be implemented? A simple rule that depends on the change in the moving average of unemployment does a good job at replicating the Ramsey policy. A rule that depends on the level, keeps benefits too high for too long, generating persistently high unemployment.
The research also considers what happens if there's heterogeneity in search efficiency and low-efficiency workers get hit harder by COVID. Benefits come down more slowly to account for dynamic selection, but the main insights follow from before.
The model and shocks are quite stylized, but believed to provide useful insights for thinking about optimal policy design and practical implementation going forward.
What are Lockdowns Good for?
Research suggests that the only way to avoid the massive costs associated with the Covid-19 pandemic is through the timely development of a vaccine (and an optimally set lockdown policy until its arrival), or the successful implementation of a TTQ program that can effectively curtail community transmission.
Recent research from IIES Associate Professor Kurt Mitman (with co-authors Mark Bognanni, Douglas Hanley and Daniel Kolliner) looks at the policy options governments have available, taking into account the relations between health and economic policies.
Their work "casts doubt on the desirability of the current US policy stance - optimistic about the arrival of a vaccine in 2020, but not implementing a nationwide lockdown."
The Economics of COVID - a Global Outlook
This group works on the measurement of the consequences of the Coronavirus with particular focus on cross country comparisons and low and middle income countries.
The group at IIES consists of Ingvild Almås (IIES), Tessa Bold (IIES), Tillmann von Carnap (IIES), Selene Ghisolfi (LEAP, Bocconi), Jesse Heitner (Aceso Global) and Justin Sandefur (Center for Global Development). Members of the group have made presentations to the Swedish development agency SIDA, DFID, and are advising policy makers in Uganda on their COVID response.
For slides from the SIDA presentation:
The Macroeconomics of Pandemics in Developing Countries: an Application to Uganda (646 Kb)
The group explores how optimal policy varies across contexts depending on demography, comorbidities, and health system strength – which affect the infection fatality rate – as well as poverty – which affects agents’ willingness to forego current consumption to reduce disease risk. Presentation slides (587 Kb)
Predicted COVID-19 Fatality Rates Based on Age, Sex, Comorbidities, and Health System Capacity Published in BMJ Global Health.
The Consequences of the Coronavirus and Lock Down Policies - Implicit Evaluations
What do Temporary Layoffs Tell Us About the Firm's Expectations?
This project is a joint venture between IIES Assistant Professor Arash Nekoei and Professor Andrea Weber at Central European University.
Dealing with the pandemic, policymakers across the world are facing a myriad of unanswered questions. One of those questions is to what extent different sectors and firms are affected, and how their own forecasts of the future of their business look.
This research argues that part of the response is hidden in the share of temporary layoffs among laid-off workers. Temporary layoffs, as opposed to permanent layoffs, are told by their employer that they would eventually be rehired, and this information is captured in Employment Office records around the globe. The fact that the share of temporary layoffs during the pandemic is so high (See Figure above) bodes well if we believe in history as a guide: A higher share of temporary lay-offs is associated with higher rates of rehiring by their old employer, not only of temporary layoffs: When employers lay off more workers temporarily, the chance of them rehiring even those workers that were let go without a promise to rehire, increases significantly. Moreover, more temporary layoffs today signal less new layoffs in the future.
Do Temporary Shocks Lead to Persistent Recessions?
The immediate effect of the COVID-19 outbreak was a strong reduction in aggregate economic activity as countries locked down and consumers avoided social activities. Although much of this original shock was expected to be temporary, policymakers and economists alike were concerned that it could lead to a persistent contraction in demand and activity if households were to increase their savings in anticipation of a long-lasting deterioration of labor market conditions.
This research asks: Under what conditions might this concern, that temporary shocks might be propagated through a persistent reduction in consumption demand, be justified?
The group (consisting of Tobias Broer, IIES, PSE and CEPR, Jeppe Druedahl, University of Copenhagen and CEBI, Karl Harmenberg, Copenhagen Business School, and Erik Öberg, Uppsala University and UCLS) shows how the structure of labor markets is key for the consumption response to temporary shocks. When job creation is costless, as in standard models of the labor market, a temporary fall in productivity has no long-term consequences, as firms hire their workers back quickly after the shock subsides. When there is hysteresis in hiring, in contrast, for example because some jobs are lost and need to be recreated by paying an upfront start-up cost, the increase in the number of unemployed through increased firing and slow vacancy creation lead to a fall in the job-finding rate that lasts substantially longer than the shock itself. This strongly increases precautionary savings and reduces aggregate demand, which amplifies the original fall in output and propagates it for a long time after the shock has subsided. They show how versions of the model where some of its elements (sticky prices, no market for private insurance, sluggish hiring because of fixed costs of creating vacancies, and a direct effect of the shock on job separations) are absent do not predict such propagation. Finally, they show how match-saving subsidies like those enacted by some countries can effectively stabilize output in response to a temporary shock.
Last updated: June 2, 2022