We study the labour market and welfare effects of expanding unemployment insurance benefits and introducing payroll subsidies during the COVID-19 pandemic. We find that both policies are complementary and are beneficial to different types of workers. Payroll subsidies preserve the employment of workers in highly productive jobs, while unemployment insurance replaces lost income for workers who experience inevitable job loss.
Should unemployment benefits be more generous during economic downturns? The optimal amount and duration of benefit payments ultimately depend on the demographic and wealth characteristics of benefit recipients.