# The Structure and Incentives of a COVID related Emergency Wage Subsidy

**Authors:** Jules Linden, Cathal O'Donoghue, Denisa M. Sologon  
**arXiv:** [2108.04198](https://arxiv.org/abs/2108.04198)  
**Date:** 2021-08-09  
**Summary page:** https://www.summarizepaper.com/en/paper/2108.04198v1/

## Key points

- COVID-19 pandemic caused significant economic shock worldwide
- Many liberal welfare states introduced temporary wage subsidies to protect workers' earnings and employment
- Irish COVID-19 wage subsidy scheme (CWS) was reformed five times during the crisis
- Simulated datasets were used to assess the structure and incentives of the CWS under five designs
- Pro-rata designs support middle earners more, while flat-rate designs support low earners more
- All designs show evidence for strong work disincentives driven primarily by generous unemployment payments and work-related costs
- Impact of design on income inequality depends on payment generosity; earnings-related pro-rata designs associated with higher market earnings inequality
- Transaction costs and political considerations behind design changes motivated by reform rationale and reintegration of CWS into permanent wage subsidies based on sectorial turnover rules could offer enhanced protection to middle-and high earners while reducing uncertainty regarding future reform needs or politically motivated designs.

## Summary

The COVID-19 pandemic caused a significant economic shock worldwide, leading to the introduction of temporary wage subsidies by many liberal welfare states to protect workers' earnings and employment. In Ireland, the Irish COVID-19 wage subsidy scheme (CWS) was reformed five times during the crisis. This paper uses simulated datasets to assess the structure and incentives of the CWS under five designs. The authors use a nowcasting approach to update 2017 microdata, producing a near real-time picture of the labor market at the peak of the crisis. Using microsimulation modeling, they assess the impact of different designs on income replacement, work incentives, and income inequality. The findings suggest that pro-rata designs support middle earners more, while flat-rate designs support low earners more. However, all designs show evidence for strong work disincentives driven primarily by generous unemployment payments and work-related costs. Flat-rate designs perform better in this regard. The impact of design on income inequality depends on payment generosity; earnings-related pro-rata designs were associated with higher market earnings inequality. However, once benefits, taxes, and work-related costs are considered there is less difference in inequality levels. In their discussion section, the authors turn to transaction costs and examine political considerations behind design changes motivated by reform rationale and reintegration of CWS into permanent wage subsidies based on sectorial turnover rules that could offer enhanced protection to middle- and high earners while reducing uncertainty regarding future reform needs or politically motivated designs. Overall, this study provides valuable insights into how different wage subsidy schemes can affect income replacement rates, work incentives and income inequality during crises like COVID-19. It also highlights potential areas for improvement in designing such schemes for future crises while considering transaction costs and political motivations behind reforms.