Pandemic transfers reduced employment but improved recipient welfare
Pandemic transfers lowered employment while raising recipients' consumption and welfare in a Federal Reserve working paper published October 14, 2026. The model estimates an aggregate employment-to-population decline of 0.2–0.4 percentage point annually during 2020–2023.
Half spent, half forgone earnings
Isabel Cairo, Shigeru Fujita and Camilo Morales-Jimenez estimate that each transfer dollar divided roughly evenly between higher consumption and lower earnings.
Transfers reduced low-income households' employment-to-population ratio by 1.9 percentage points in 2020 and 1.4 points in 2021.
Aggregate output fell about 0.3 percent annually over 2020–2023 relative to the no-transfer counterfactual.
Recipients' spending gains were largely offset by lower consumption among households financing transfers through lump-sum taxes.
Tighter borrowing constraints amplified responses during the pandemic: peak effects exceeded steady-state effects by 36.9 percent for recipient consumption, 42.7 percent for recipient employment and 52.4 percent for aggregate output.
Savings prolong the response
The two-sector model uses household survey and industry data for 2015–2023.
Low-income households can save large transfers, spreading consumption gains and employment reductions over time.
Removing transfers produces a 0.84 percent consumption-equivalent welfare loss for recipients and a 0.03 percent gain for financing households.
Doubling transfers instead adds 0.49 percent to recipient welfare and reduces financing households' welfare by 0.02 percent.
The authors treat lower employment as an optimal household choice, not a distortion.
Financing limits the conclusion
The authors caution that the observed transfer-employment relationship is not necessarily causal.
Their welfare results rely on lump-sum taxes, while distortionary financing would weaken the case for larger transfers.
These preliminary findings are the authors' views, not those of the Federal Reserve Board.