We develop a heterogeneous-agent New Keynesian model featuring a frictional labor market with on-the-job search to quantitatively study the positive and normative implications of employer-to-employer transitions for inflation.
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.
