We are not insured against pandemic. We were not insured against the pandemic, so workers in sectors that are locked down are going to lose their income. And those workers would be an important source of demand for the sectors that are not locked down, that are still active.
When you don’t have an insurance system in place, then the demand effects are going to be even larger. And this important ingredient—that is, incomplete markets that amplify the demand effect of the COVID pandemic—bring us to think that an important ingredient of policy is social insurance.
So traditional expansionary policies, like monetary and fiscal policy, are clearly beneficial once we think demand is the piece that is the most-affected part of the economy. But on the other hand, we think that social insurance is an important ingredient of optimal policy.
And that brings up another important issue, which is: How should we implement social insurance policies? In particular, should we help mostly the firms in the sectors that are locked down to survive? Or should we help directly the workers who lost their jobs through unemployment insurance policies?
In our paper we make the point that incentivizing labor hoarding is important. Labor hoarding means keeping workers on the paycheck when your business is temporarily locked down. This is important because of the positive value of job matches.
If you can still pay your workers without firing them when your sector is locked down, this is going to help for social insurance because the workers are not going to lose their income abruptly. But at the same time, this is going to help us in the longer run when the things are going to recover because it helps these firms to keep those workers who acquired an expertise in that particular firm. It’s going to help not to lose important human capital. So incentivized avoidance of job destruction is going to be important, we believe, in the recovery. And so, in particular, policies like paycheck-protection programs may be desirable.
Governments have implemented fiscal packages that have been moves in the right direction. They have, of course, a broader policy scheme that includes both help to the workers that have been fired and to the firms.
I’m not saying that we don’t want to strengthen unemployment insurance programs. That’s very important as well. I’m just saying that it’s important to have also a policy in place that can help businesses not to shut down because it is going to be important for the preservation of job matches that may be important to getting a better recovery and faster recovery after the shock is over.