Isabel Cairó, Shigeru Fujita, and Camilo Morales-JimenezThe fiscal transfers deployed during the COVID-19 pandemic were unprecedented in scale and strongly progressive. Using CPS/ASEC data, we document that the decline in employment during the pandemic was larger for low-income households and tightly linked to the intensity of transfer receipt, a pattern absent during the Global Financial Crisis. We develop and estimate a two-sector, heterogeneous-household general equilibrium model in which low-income households are borrowing-constrained in normal times but can save out of sufficiently large transfers. Because preferences permit wealth effects on labor supply, transfers both reduce labor supply and raise consumption, and a dollar of transfers is split roughly evenly between the two margins. We find that the effects of transfers are state-dependent: because the borrowing constraint binds more tightly in a deeper recession, the same transfer relaxes a tighter constraint and delivers an employment and consumption response about 40 to 50 percent larger during the pandemic than when the same transfer is introduced in the steady state. In the model, transfers were welfare-improving for recipients, with gains diminishing as transfers increase.
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