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Effects of wage compensation and containment policies on Labor supply during pandemics

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  • Fiorini, Luciana C.
  • Maldonado, Wilfredo L.

Abstract

The importance of combining wage compensation policies with contagion containment strategies during a pandemic became evident after the COVID-19 pandemic. We examine the impact of these policies on the labor market using an aggregative game framework that describes the interaction of individual and aggregate labor supply decisions, which has not been considered in previous approaches. Workers must choose their labor supply considering the probability of contagion and compensation for income reductions in case of infection and assess the probability of contagion based on the public perception of the aggregate labor supply. We analyze the effects of changes in contagion containment parameters and wage compensation policies on individual and aggregate labor supplies. We also demonstrate evident labor supply cycles and persistent oscillations in contagion probability values, which are commonly observed in pandemic processes. We conclude that successful public policies that are intended to stabilize the labor market depend on a combination of instruments that consider population size and workers’ risk aversion.

Suggested Citation

  • Fiorini, Luciana C. & Maldonado, Wilfredo L., 2025. "Effects of wage compensation and containment policies on Labor supply during pandemics," Economic Modelling, Elsevier, vol. 147(C).
    • Handle: RePEc:eee:ecmode:v:147:y:2025:i:c:s0264999325000252
    DOI: 10.1016/j.econmod.2025.107030
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    Keywords

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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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