The COVID-19 pandemic: shocks to human capital and policy responses

The COVID-19 pandemic is significantly disrupting human capital in labour markets. Workforce reductions cause firm outputs to fall and prices to rise, leading to unprecedented economic costs. To quantify the economic costs, we develop a dynamic general equilibrium macroeconomic model that incorporates susceptible-infectious-recovered epidemiology dynamics, where individuals can be healthy, infected or recovered so that evolution of human capital can be well tracked. We characterise optimal public policy responses to the decline in human capital by either isolating susceptible residents from infected residents to reduce the spread of disease or increases in government spending to improve the recovery and death rates.