Did the COVID-19 pandemic impact income distribution?

Abstract:

This analysis aims to explore how employee income distribution performed during the first year of the COVID-19 pandemic; it further aims to compare it with a pre-pandemic scenario (2019) and with the financial and the sovereign debt crisis. By referring to the EU Labour Force Survey (LFS) database for six EU Member States (Denmark, Estonia, Greece, Ireland, Italy, and Portugal), and by using transition matrices and a selection of mobility indices as empirical tools, the direction and the magnitude of the movement across quantiles experienced by employees are explored. For each of the years under scrutiny, the transition across quintiles is computed between two very close periods (e.g. from one quarter to another).

Sudden changes in the structure of the transition matrices and the value of the respective mobility indicators, when observed in comparison with a ‘benchmark’ year, may be interpreted either as a shock to the economic system, or the (counter) effect of automatic stabilisers and discretionary public policy measures (and as a combination of the two). The direction and the magnitude of the change may depend on different factors, including the kind of crisis, labour market and market income response, along with the design and timing of public policy discretionary cushioning measures.

This conclusion emerges from the comparison of results collected for the COVID-19 crisis with those of the Great Recession: Two different kinds of crisis, two different sets of transmission mechanisms from the origin of the crisis to the real economy, two different responses of the labour market and of the public policy intervention. During the COVID-19 crisis, the overall level of income mobility increased, while during the financial crisis and sovereign debt crisis it decreased. The reason lies both in the different magnitude of flows from employment to unemployment and in the type and timing of the measures taken.

As for the COVID-19 pandemic vs a pre-pandemic scenario, in-depth observation of the transition matrices and of the relative mobility indices suggests an increase of the overall mobility that is explained by specific movements of the ‘upward’ and ‘downward’ movers, as well as from the patterns followed by the proportion of individuals belonging to the single quantiles. When the figures for different indicators are broken down, it seems that there is a general worsening condition of females compared to males, of the youngest (16-29-year-olds) and of employees without tertiary education (ISCED 6-8).

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