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Home / Publications / Research / Economic Brief / 2022

Economic Brief
April 2022, No. 22-13

Government Programs and Their Effects on Welfare and
Employment: A Conference Recap
By John Mullin

How did the expansion of unemployment benefits during the pandemic affect
aggregate spending and job search? What are the short-term and long-term
effects of federal minimum wage hikes? Why do the effects of public pension
retrenchments depend on how they are phased in? These were among the
questions addressed by economists during a recent research conference.
Economists from the Richmond Fed and research universities met in Richmond for a
conference in March. Researchers presented papers on topics related to public policy,
including expanded unemployment benefits, disability insurance, the minimum wage,
public pensions and economic stimulus payments. This Economic Brief summarizes those

Expanded Unemployment Benefits: Better-thanExpected Results
In response to the COVID-19 pandemic, the U.S. implemented the largest expansion of
unemployment insurance (UI) benefits in its history. Weekly supplemental UI benefits
ranged between $300 to $600 per person. The supplemental $600 nearly tripled the usual
benefits for the median UI recipient, whose resulting total benefits replaced 145 percent of
lost income. The historically high level of benefits raises two important questions:
How much did the expanded benefits increase consumer spending?
How much did they discourage job finding?
Pascal Noel of the University of Chicago presented research that addresses these
questions. The paper he presented — "Spending and Job Search Impacts of Expanded
Unemployment Benefits: Evidence From Administrative Micro Data" — was co-authored

with Peter Ganong and Joseph Vavra of the University of Chicago and the National Bureau
of Economic Research, and Fiona Greig, Max Liebeskind and Daniel M. Sullivan of the
JPMorgan Chase Institute.
The researchers used anonymized bank account data covering millions of households to
estimate workers' consumption and job search responses to the unprecedented UI benefits
expansion. They found that — in sharp contrast to normal times when workers' spending
declines after a job loss — workers who received supplemental UI benefits during the
pandemic increased their spending. Using quasi-experimental research designs, they
estimated a large marginal propensity to consume out of expanded UI benefits. Notably,
they found that spending responses were large even for households that had built up
substantial liquidity through prior receipt of expanded benefits, which contradicts the
predictions of standard economic models.
Simple job search models predict a sharp decline in search in the wake of a substantial
expansion of UI benefits, followed by a sustained rebound when benefits expire. Instead,
the researchers found that the job finding rate remained quite stable during the pandemic.
According to the researchers, their findings suggest that expanded UI benefits during the
pandemic were a more effective policy than predicted by standard structural models.
Abstracting from general equilibrium effects, they estimated that the benefits expansion
increased overall U.S. spending by a substantial 2.0 percent to 2.6 percent, while lowering
employment by only 0.2 percent to 0.4 percent.

Expanded Unemployment Benefits: Isolating the
Disincentive Effect
Between March 2020 and April 2020, the U.S. economy shed 22 million jobs, a consequence
of stay-at-home orders and business restrictions to slow down the spread of COVID-19.
This, in turn, triggered the expansion of UI programs, which has fueled a vigorous debate
about the extent to which it contributed to labor supply shortages and slowed economic
Marios Karabarbounis of the Richmond Fed presented his paper, "Disincentive Effects of
Pandemic Unemployment Benefits," which he co-authored with Andreas Hornstein of the
Richmond Fed, Etienne Lale of the University of Quebec at Montreal, and Andre Kurmann
and Lien Ta of Drexel University. The paper emphasized that the overall effect of UI benefits
on employment depends on two countervailing mechanisms:
UI benefits have a disincentive effect on labor supply, which tends to impede job
UI benefits increase disposable income and thereby have a stimulative effect on
aggregate demand, which tends to encourage job creation.

The authors conjecture that these offsetting effects may explain why some recent studies
have found that expanded UI benefits during the pandemic had only a relatively small
negative effect on employment.
The paper proposes a new research design to disentangle the disincentive effects of
pandemic UI benefits from their stimulus effects. To that end, the authors build a
quantitative equilibrium labor search model, which they estimate using payroll data on
small service-sector firms provided by Homebase, an online payroll tool used by more than
100,000 small businesses. They find that within narrowly defined localities and industries,
employment in low-wage establishments recovered significantly more slowly than
employment in high-wage establishments (although employee work hours and wages grew
more quickly in low-wage establishments than in high-wage establishments).
Based on these local-industry differences, they estimate that the gap in employment
recovery between low-wage and high-wage establishments tends to be more pronounced
in local industries with relatively high UI replacement ratios (that is, where UI benefits are
high relative to employment income).

Subsidizing Firms to Accommodate Injured Workers
Work-limiting disabilities and health shocks are some of the largest risks that workers face.
These risks not only have large consequences for health spending but also affect longer-run
labor market outcomes. In 2019, the Social Security Disability Insurance program and state
workers' compensation programs provided wage replacement benefits costing $145 billion
and $63 billion, respectively. Naoki Aizawa of the University of Wisconsin-Madison
presented research that attempts to assess the efficiency of these programs. His paper —
"Firm Accommodation and the Design of Social Insurance: Evidence from Return to Work
after Workplace Disability (PDF)" — was co-authored with Corina Mommaerts of the
University of Wisconsin-Madison and Stephanie Rennane of the RAND Corporation.
The paper focuses on an understudied yet potentially key determinant of a worker's return
to work: employer flexibility. When employers are willing to adjust the work environment to
accommodate the needs of workers who have suffered injuries, it not only encourages
worker re-entry into the labor force but also increases worker productivity in the long run.
Yet, although various policies have been proposed to encourage such accommodation, little
is known about how these policies work in practice.
To study this, the researchers leverage detailed administrative data from a unique workers'
compensation program in Oregon that provides wage subsidies to encourage firms to make
workplace accommodations. Exploiting a policy change to the wage subsidy, they estimate
that accommodation is responsive to wage subsidy incentives, and that accommodation
has positive effects on long-term labor market outcomes, including employment and

They then develop and estimate a frictional labor market model with work-related disability
and firm accommodation. The model shows how labor market frictions and worker
turnover can lead to firm under-accommodation and inefficient labor market outcomes
following workplace injuries. They estimate that a wage subsidy of 40 percent for injured
workers would maximize overall worker welfare.

The Short-Term and Long-Term Effects of the Minimum
Recent proposals have been advanced in the U.S. to increase the federal minimum wage
from its current level of $7.25 to at least $15 per hour. An increase of this size would affect
a much larger fraction of the U.S. workforce than previous hikes in the minimum wage. The
goal of these proposals is to improve the welfare of workers currently earning less than this
new minimum, especially those at the bottom of the wage distribution.
Tom Winberry of the Wharton School presented the paper "The Minimum Wage in the
Short Run and the Long Run," which he co-authored with Erik Hurst of the University of
Chicago's Booth School, Patrick Kehoe of Stanford University and the Minneapolis Fed, and
Elena Pastorino of the Hoover Institute, Stanford Institute of Economic Policy Research and
the Minneapolis Fed.
The paper develops a quantitative framework to study the distributional impact of large
changes in the minimum wage in both the short run and the long run. The researchers
distinguish between the short run and the long run because of two key disparate facts
about how the labor market responds to wage and price changes at these different
Labor economics literature has found that small changes in the minimum wage have
small effects on employment in the short run.
Macroeconomics literature has found that the decline in the relative price of capital
over the past 40 years — which makes labor more expensive relative to capital — has
had a large effect on employment and wages in the long run.
The researchers develop a general equilibrium framework with worker heterogeneity,
monopsony power and putty-clay frictions. They find that a high minimum wage has
perverse distributional impacts in the long run: It reduces the employment, income and
welfare of precisely the low-income workers it was meant to help. However, these long-run
consequences take 20 years to fully materialize because firms slowly adjust the labor
intensity of their capital stock.
The authors examine alternative policies to assist low-wage workers — such as the earnedincome tax credit — and find they are much more effective than minimum wage hikes at
improving outcomes for workers at the bottom of the wage distribution.

Public Pension Retrenchment: A Matter of Timing
Over the last half century, public spending on old-age pensions in Organization for
Economic Cooperation and Development (OECD) countries has been increasing, albeit at
varying rates. With aging societies, policymakers have increasingly focused on pension
retrenchments designed to keep their pension systems solvent. The unprecedented fiscal
interventions in response to the COVID-19 pandemic will further weigh on governments'
fiscal capacity and may motivate future pension retrenchments. An important question for
policymakers is how various pension reform proposals may affect government pension
expenditures and labor force participation.
Sarah Zubairy of Texas A&M University presented the paper "Public Pension Reforms and
Retirement Decisions: Narrative Evidence and Aggregate Implications," which she coauthored with Huixin Bi of the Kansas City Fed. The paper uses a new dataset constructed
by the researchers that records changes in public pension policy for 10 OECD countries
between 1962 and 2017. It contains information on four aspects of historical pension
The sign of pension changes (whether pensions became more generous or less)
The policy tools associated with changes in pension policy (whether they involved
changes in benefit formulas, coverage, indexation policy or the retirement age)
The motivation behind policy changes
The implementation lags (the time elapsed between when a policy change is initially
enacted and when it is fully implemented)
With the new dataset, the researchers study the effects of structural pension reforms on
labor force participation rates (LFPRs) and pension spending. They find that the effects of
structural pension reforms depend greatly on whether they come with phase-in periods.
If structural pension retrenchments are implemented immediately without a phase-in
period, LFPRs for groups between the ages of 55 and 64 years tend to rise. In this case,
reduced pension benefits (in combination with a higher LFPR for the older population) lead
to a decline in pension spending.
However, if it is announced that structural pension retrenchments will be phased in over
time, the LFPRs for these groups decline. Consequently, government spending on old-age
pensions increases (rather than decreases) over the medium run.

Stimulus Checks as Substitutes for Monetary Easing
According to standard New Keynesian theory, policymakers can improve economic
outcomes by using countercyclical monetary and fiscal policies. In recent years, however,
with short-term interest rates close to zero, the space for monetary stimulus has narrowed.
A natural question, then, is how to replicate the effects of standard monetary policy
through alternative fiscal tools.

Previous work has identified tax policy — often labeled unconventional fiscal policy — as an
attractive policy option. The idea is that policymakers can use time-varying tax rates to
manipulate intertemporal prices and thereby replicate the effects of the short-term interest
rate changes of monetary policy. In practice, however, implementing such a countercyclical
fiscal policy is challenging, because it requires policymakers to jointly fine-tune several
different taxes and subsidies at business-cycle frequencies.
Christian Wolf of the Massachusetts Institute of Technology presented the paper "Interest
Rate Cuts vs. Stimulus Payments: An Equivalence Result." The paper develops a novel
conceptual approach to monetary-fiscal policy equivalence and applies it to a different fiscal
policy instrument: lump sum payments or "stimulus checks," a policy tool that was used
during the COVID-19 recession. The setting for his analysis is a standard New Keynesian
model without capital, extended to feature uninsurable household income risk.
Wolf establishes three main results:
He specifies the conditions under which policymakers can use lump-sum taxes and
transfers to achieve the same macroeconomic results that can be achieved through
interest rate policy.
He characterizes the tax/transfer policies that can be used to replicate various levels of
monetary accommodation.
He uses a New Keynesian model with heterogenous agents to compare macroequivalent interest rate and stimulus check policies.
He finds that, since stimulus checks directly boost the consumption of those with low asset
levels, the policy reduces consumption inequality relative to the macro-equivalent interest
rate cut.
John Mullin is a senior economics writer in the Research Department at the Federal Reserve
Bank of Richmond.
To cite this Economic Brief, please use the following format: Mullin, John. (April 2022)

"Government Programs and Their Effects on Welfare and Employment: A Conference
Recap." Federal Reserve Bank of Richmond Economic Brief, No. 22-13.
This article may be photocopied or reprinted in its entirety. Please credit the author, source,
and the Federal Reserve Bank of Richmond and include the italicized statement below.
Views expressed in this article are those of the author and not necessarily those of the Federal
Reserve Bank of Richmond or the Federal Reserve System.

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