Lit in Review: Policy options during Covid: protecting workers, part 2
The most recent Journal of Economic Perspectives includes three essays on COVID policy. Together, they account for 80 pages, which I will summarize below
Part 1 looked at the historical impact of pandemics.
A Social Insurance Perspective on Pandemic Fiscal Policy: Implications for Unemployment Insurance and Hazard Pay - C Romer and D Romer
The standard macroeconomic framework taught in most schools is that of aggregate demand and aggregate supply. The pandemic was partly a supply shock (workers not working) and partly a demand shock (people not spending). The typical policy recommendation is to get aggregate demand higher again, which means tax cuts, more government spending, and print more money, any and all of which will lead to higher inflation.
Romer and Romer argue that we should treat pandemics, floods, and other disasters more like social insurance than AD/AS. In the absence of a private insurance market against pandemics, the government taxes the sectors that are relatively unaffected in order to provide funds (unemployment insurance) to the sectors that are shut down and people are unable to work and a “hazard pay” subsidy for essential workers.
(Yes, I hear the readers of this website groaning. #1) I’m reporting rather than recommending. #2) Given a choice between taxing/debt with widespread, untargeted spending like we had and a more targeted policy which would also necessarily be smaller, I’d rather have the Romers’ policy.)
They point out that the government should not provide full insurance because 1) to the extent workers don’t enjoy working, unemployed people would be better off than workers, 2) public perceptions of fairness, 3) higher-income individuals may be able to self-insure and therefore need less public insurance. Pushing in the other direction, “Someone who is unemployed may face a long and challenging job search when the pandemic ends” and therefore need more funds or for a longer time. They estimate that the unemployed should have a consumption 10-15% less than the employed because of these concerns. Actual policy was more generous than they recommend.
They cite some interesting marginal propensity to consume estimates:
66% of stimulus checks were spent within 3 months for people earning less than $6,000/year but only 15% for those earning <$60,000
Unemployment insurance benefits are spent somewhere between 27% and 83%, with a likely estimate of 0.77.
A third paper estimates that the mpc rises from .35 over a month to .55 over a year.
In identifying who should receive hazard pay, both the federal government’s aborted plan and PA’s enacted plan were too generous. Healthcare workers and transit workers were 3x as likely to contract COVID during the first wave, while food service workers, transit, and cleaners were more likely than others in the second wave. In total that would be 10% of the US population with the highest probability of being affected and another 8%. They estimate roughly a $4/hour hazard pay subsidy for the first group and $2/hour for the second group to compensate them for continuing to work despite hazardous working conditions.
“Should We Insure Workers or Jobs During Recessions?” by G. Giupponi, C. Landais, and A. Lapeyre
The US spent a lot on unemployment insurance and boosting unemployment payments. Europe focused more on short-time work (work sharing) schemes, where the government subsidizes the firm to keep workers attached to the business but at lower hours. Both systems have moral hazard – one encouraging workers to not try so hard to find a new job and the other rewarding firms for keeping total hours lower than optimal. They mention that in Italy, workers are allowed 4 months more unemployment benefits after age 50 than before it, and demonstrate that the unemployment incidence suddenly increases at age 50.
On why it is beneficial to insure jobs/workers, they point to normal frictions in the labor market that make it costly to find new employees, job-specific human capital loss, and preventing long-run impacts on households from being unemployed.
The two policies tend to reach different groups of workers. “Short-term work tended to protect mostly insiders, individuals with higher incomes and better self-insurance options. Unemployment insurance … mostly protected the outsiders” like the young or lower education. A comparison of Germany and Italy shows that short-term work is better at insuring against temporary shocks, not permanent ones.
$1 of unemployment benefits costs the government between $1.50 and $2.50. $1 of short-term work benefits costs around $1.40. “One additional worker enrolling in short-time work is correlated with 0.27 fewer workers being non-employed.” If firms have to demonstrate their loss of revenue in order to qualify, that reduces the risk of poor targeting.
They conclude: “European policymakers … probably did the right thing. The value of insurance provided by short-time work transfers is clearly lower than that of unemployment insurance benefits, but the moral hazard they entail seems more limited… .” Because the two policies reach different kinds of workers, “we should insure workers and jobs during recessions.”
The $800 Billion Paycheck Protection Program: Where Did the Money Go and Why Did It Go There? By D. Autor et al.
The government used private banks to distribute forgivable loans to small (<500 employee) businesses on the condition they keep their payroll close to the same size as before. They find that it preserved 2-3 million job-years at a cost of $169-258,000 per job-year saved and reduced the rate of temporary firm closures. For example, in mid-April firms with 401-500 employees had shed 12% of their workforce while 501-600 employee-firms had shed 16% of their workforces. The effects on the smallest, most liquidity-constrained firms was about double that.
The program was clearly temporary, remarkably timely, and very poorly targeted. About ¾ of the money went to the top 20% of the income distribution. One problem was that the program had two goals: preserve jobs and provide liquidity. They conclude that by investing in administrative capacity now, and creating more short-term work schemes as above, we could improve targeting and reduce the cost of fighting recessions.