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

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. • During pandemics, labor supply depends on contagion probability and income reduction. • The aggregate decision determines the probability of contagion. • Wage compensation and containment policies affect the Nash equilibrium. • Parameter values determine attracting, repelling, and cyclical dynamics. • Policymakers may derive optimal containment and compensation policy parameters.