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Review of Income and Wealth

Series 68, Number 2, June 2022
DOI: 10.1111/roiw.12530

WELFARE RESILIENCE AT THE ONSET OF THE COVID-­19 PANDEMIC

IN A SELECTION OF EUROPEAN COUNTRIES: IMPACT ON PUBLIC
FINANCE AND HOUSEHOLD INCOMES

by Olga Cantó
Universidad de Alcalá and EQUALITAS

Francesco Figari
University of Insubria, ISER University of Essex, CeRP Collegio Carlo Alberto and Dondena

Carlo V. Fiorio*
University of Milan, Irvapp-­FBK and Dondena

Sarah Kuypers, Sarah Marchal and Gerlinde Verbist

Herman Deleeck Centre for Social Policy, University of Antwerp

Marina Romaguera-­de-­la-­Cruz
Universidad Antonio de Nebrija
AND

Iva V. Tasseva

London School of Economics and Political Science

This paper assesses the impact on household incomes of the COVID-­19 pandemic and governments’
policy responses in April 2020 in four large and severely hit EU countries: Belgium, Italy, Spain and
the UK. We provide comparative evidence on the level of relative and absolute welfare resilience at
the onset of the pandemic, by creating counterfactual scenarios using the European tax-­benefit model
EUROMOD combined with COVID-­19-­related household surveys and timely labor market data. We
find that income poverty increased in all countries due to the pandemic while inequality remained
broadly the same. Differences in the impact of policies across countries arose from four main sources:
the asymmetric dimension of the shock by country, the different protection offered by each tax-­benefit
system, the diverse design of discretionary measures and differences in the household level circum-
stances and living arrangements of individuals at risk of income loss in each country.

JEL Codes: D31, H55, I32

Keywords: COVID-­ 19, household incomes, tax-­

benefit microsimulation, income protection, cross-­
country comparison

*Correspondence to: Carlo V. Fiorio, Department of Economics, Management and Quantitative

Methods (DEMM), University of Milan, Via Conservatorio, 7 20122 Milan, Italy and Irvapp-FBK
and Dondena ([email protected]).
© 2021 The Authors. Review of Income and Wealth published by John Wiley & Sons Ltd on behalf of
International Association for Research in Income and Wealth
This is an open access article under the terms of the Creative Commons Attribution License, which
permits use, distribution and reproduction in any medium, provided the original work is properly
cited.

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Review of Income and Wealth, Series 68, Number 2, June 2022

1. Introduction
The COVID-­19 pandemic has led to a worldwide economic downturn worse
than the one that characterized the 2008 Great Recession. The potential impact
on GDP, although mostly unpredictable still today without a clear knowledge of
the further development of the health emergency, can lead to a massive slump in
economic development (Dorn et al., 2020). OECD estimates for the initial direct
impact of the crisis revealed a decline in annual GDP growth of around 2 percent-
age points for each month of economic shutdown (OECD, 2020a). Focusing on
the situations faced by workers, the International Labour Organization estimated
initially a rise in global unemployment of between 3 percent and 13 percent, with
underemployment expected to increase on a large scale and the decline in eco-
nomic activity and travel limits impacting both manufacturing and services (ILO,
2020).
To limit the spread of the virus governments across Europe restricted or com-
pletely shut down non-­essential economic activities. These containment measures
resulted in unprecedented demand and supply shocks. Between the first and sec-
ond quarter of 2020, GDP fell drastically in some European countries—­by 11.8
percent in Belgium, 13 percent in Italy, 17.9 percent in Spain and 18.8 percent in
the UK, making them some of the worst affected countries economically in
Europe.1
The picture described above, as well as the lessons of previous recessions such
as the one of 2008, suggest that the downturn due to the COVID-­19 pandemic will
overshadow European economies for years to come, through a legacy of unemploy-
ment, public debt and long-­lasting impacts on household incomes (Jenkins et al.,
2013). As Saez and Zucman (2020, p. 1) rightly point out, governments “can prevent
a very sharp but short recession from becoming a long-­lasting depression” by acting

1See Eurostat’s indicator “GDP and main components (output, expenditure and income)

[NAMQ_10_GDP].”
Note: We thank Silvia De Poli, Adrián Hernández Martín, Manos Matsaganis, Holly Sutherland
and the participants to the EUROMOD Research Workshop (2020) and the OECD-­WISE seminar
(2020). The support of the Collegio Carlo Alberto is acknowledged. Olga Cantó and Marina
Romaguera-­de-­la-­Cruz acknowledge support from the Comunidad de Madrid—­H2019/HUM-­5793
and from the Spanish Ministerio de Ciencia e Innovación—­PID2019-­104619RB-­C41. Sarah Kuypers,
Sarah Marchal and Gerlinde Verbist acknowledge support from the Belgian Federal Public Service
Social Security. We use EUROMOD (version I3.0+) which is developed and managed by the Institute
for Social and Economic Research (ISER) at the University of Essex, in collaboration with the
European Commission—­JRC Seville and national teams. We are indebted to Holly Sutherland and the
many people who have contributed to the development of EUROMOD. The process of extending and
updating EUROMOD is financially supported by the European Union Programme for Employment
and Social Innovation “Easi” (2014-­2020). We make use of the following microdata: the Italian and
Spanish versions of the SILC data made available by ISTAT and INE; EU-­SILC made available by
EUROSTAT; the Corona Study data made available by the Universities of Antwerp and Hasselt; the
Family Resources Survey and Understanding Society COVID-­19 Study made available by the UK
Department of Work and Pensions (DWP) via the UK Data Service; the Spanish Annual Labour Force
Survey (INE), register data on monthly Social Security affiliates (Ministerio de Inclusión Social y
Migraciones) and information on monthly benefits from Servicio Público de Empleo Estatal (SEPE,
Ministerio de Trabajo y Economía Social). Data providers bear no responsibility for the analysis or
interpretation of the data reported here. Any mistakes are the authors’ only.
Funding information: Open Access Funding provided by Universita degli Studi di Milano within
the CRUI-CARE Agreement. [Correction added on 21st May 2022, after first online publication: CRUI
funding statement has been added.]

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Review of Income and Wealth, Series 68, Number 2, June 2022

as payer of last resort: providing insurance to the affected workers and making sure
that cash flows to idle workers and businesses immediately. Governments across
Europe indeed swiftly reacted to the economic impact of the COVID-­19 shock by
adjusting existing welfare policies or introducing new emergency measures. These
policies were often innovative and introduced at a much larger scale compared to
the policy responses to the 2008 Great Recession (Moreira and Hick, 2021).
In light of these policy responses, this paper assesses the welfare resilience of
household incomes during the pandemic in a cross-­country perspective. In par-
ticular, we analyze the extent to which the tax-­benefit systems of four large and
severely hit European countries—­Belgium, Italy, Spain and the UK—­provided
income stabilization for those who lost all or part of their earnings as a conse-
quence of the pandemic and restrictions to economic activities.
The countries studied in this paper have experienced high levels of infection rates
and many deaths in their populations. Italy was the European country that experi-
enced the first sudden outbreak at the end of February 2020. Subsequently, within the
first half of March 2020 both Spain and Belgium started to follow a rapid increase in
infections and deaths and by the end of March 2020 that was also happening in the
UK. At the end of 2020, the four countries registered some of the highest number of
deaths per million inhabitants in Europe (OECD/European Union, 2020).
We focus on the impact in the first month of the COVID-­19 pandemic (April
2020) as the lockdown was in most countries the strictest at that time. Focussing
on a single month has some clear advantages for measuring welfare resilience to
an unexpected shock. First, it is easier to identify who was affected by the earnings
and employment shocks in each country as this is directly linked to the national
rules of the economic shutdown and to each country’s labor market structure.
Second, it allows for an evaluation of both country-­specific short-­term tax-­benefit
automatic stabilizers and emergency policy measures before any of the EU-­level
initiatives to cushion the shock kicked in.
We measure the amount of income insurance that individuals and their house-
holds received from the welfare state in April 2020, effectively providing a measure
of the resilience of welfare systems at the beginning of the crisis. A comparative per-
spective across the most severely hit countries is warranted as cross-­country differ-
ences in welfare resilience may be considerable. Indeed, Dolls et al. (2012) show that
automatic stabilizers differ greatly across countries, particularly in the case of asym-
metric shocks. Moreover, in the European context there exists an important variation
in income stabilization mechanisms of taxes and benefits, which in some countries,
especially in Southern Europe, are poorly designed to face times of emergency.
Besides automatic stabilizers, the emergency policy measures introduced by many
European governments to support the most vulnerable (OECD, 2020b) also differ
across countries, but the efficacy of these policies has still to be assessed empirically.
At the time of writing, the possibilities for empirical analysis are constrained
by the lack of up-­to-­date and longitudinal information on household net incomes,
which usually only becomes available a few years after the economic shock and only
in a limited number of countries. To address this limitation, we assess the impact of
the economic lockdown on household incomes by means of simulating counterfac-
tual scenarios with a fiscal microsimulation approach (Figari et al., 2015).

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Review of Income and Wealth, Series 68, Number 2, June 2022

First, we use pre-­pandemic household income surveys to construct our base-

line income distribution before the pandemic. We then use timely information on
earnings and employment changes during the first month of the pandemic in each
country, based on COVID-­19-­related surveys or policy legislation. We use these
timely data to simulate similarly sized earnings and employment shocks to workers
in the pre-­pandemic household surveys. Workers affected by the shocks become
unemployed, furloughed or see a reduction in their hours/earnings. Second, we use
the tax-­benefit model EUROMOD to calculate household tax liabilities, benefit
entitlements and net incomes in the baseline and after the simulation of shocks.
Thus, we consider the direct cushioning effect of the tax-­benefit system which
depends on household market incomes as well as individual and household char-
acteristics. It is important to note that we do not consider other aspects such as
the reduced likelihood to get a job for those who are looking for one and the wider
consequences of macroeconomic feedbacks. The use of microsimulation models to
consider how welfare systems protect people against an extreme shock is known as
a “stress test” of the tax-­benefit system (Atkinson, 2009) and has become increas-
ingly popular in analysing consequences of the Great Recession as shown for
instance by Fernandez Salgado et al. (2014) and Jenkins et al. (2013).
A key feature of our analysis is that it provides a first cross-­country analysis
of the initial impact of the COVID-­19 pandemic on household net incomes, taking
into account the interaction between the country-­specific economic shocks and the
national policy responses. In particular, we find that cross-­country variations in
the budgetary and distributional consequences of the pandemic depend on (1) the
asymmetric dimension of the shock in each country, (2) the different levels of pro-
tection offered by the tax-­benefit systems, (3) the diverse design of discretionary
measures and (4) the differences in the household level circumstances and living
arrangements of individuals at risk of income loss in each country.
The paper is structured as follows. Building on a review of the most up-­to-­date
contributions to the literature, we highlight the main motivations for our approach
in Section 2. There we describe the tax-­benefit model EUROMOD; simulations of
the COVID-­19 earnings and employment shocks and the characteristics of those
affected by the shocks in the different countries considered; and the indicators we
apply to measure the resilience of the welfare systems in both relative and absolute
terms. The most relevant features of the policy measures included in the analy-
sis are described in Section 3. Empirical evidence on the size and distribution of
earnings losses and compensation offered by the countries’ tax-­benefit systems is
presented in Section 4. Section 5 shows the differing degrees of relative and abso-
lute welfare resilience across countries. In Section 6 we conclude, summarize the
main findings and suggest future improvements in light of ongoing developments
as data are made available.

2. Literature Review and Empirical Approach

As Clark et al. (2020) have recently underlined, we observe a fast-­growing lit-
erature on the impact of lockdowns on well-­being (e.g. Layard et al., 2020; Brodeur
et al., 2021), labor market participation (e.g. Adams-­Prassl et al., 2020), levels of

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Review of Income and Wealth, Series 68, Number 2, June 2022

unemployment or underemployment (e.g. Guven et al., 2020) and gender equality

(e.g. Alon et al., 2020; Farré et al., 2020) in a variety of countries.
Regarding the distributional consequences of the pandemic, Clark et al.
(2020), Menta (2021) and Belot et al. (2020) provide a cross-­country compara-
tive perspective exploiting two specific surveys undertaken in different countries.
The first two papers use longitudinal high-­frequency information on household
disposable income in five European countries (France, Germany, Italy, Spain and
Sweden) run by the University of Luxembourg starting at the end of April 2020 and
the third one uses cross-­sectional data from China, Japan, South Korea, Italy, the
UK and the US also for April 2020. However, the data do not allow to distinguish
the impact of the labour income shocks versus the extent to which the tax-­benefit
systems and emergency policies have provided household income stabilisation.
Several country-­specific studies specifically focus on the impact of welfare mea-
sures on household disposable income: Beirne et al. (2020) and O’Donoghue et al.
(2020) on Ireland, Brewer and Gardiner (2020) and Brewer and Tasseva (2021) on the
UK, Bruckmeier et al. (2020) on Germany, Figari et al. (2020) on Italy, Li et al. (2020)
on Australia and Marchal et al. (2021) on Belgium. Nevertheless, using the results of
different country-­specific analyses to compare the levels of welfare resilience to a shock
is a challenging task because authors use diverse strategies to simulate the impact of
the shocks on household incomes and analyse different indicators of resilience.
Almeida et al. (2020) present EU cross-­country comparisons for the impact
of the pandemic on household incomes, using a re-­weighting approach to sim-
ulate COVID-­19 labor market shocks. They start from the macroeconomic sce-
narios included in the European Commission Spring 2020 forecasts and translate
the changes in several aggregate variables present in the macroeconomic scenarios
into changes at the individual level by reweighting individual observations. This
reweighting strategy is useful but has a main drawback as it assumes that the new
unemployed or furloughed have similar characteristics as those observed in the data
and does not adjust to real sector-­specific unemployment changes due to lockdown
nor does take into account newly introduced emergency measures, ignoring the
potentially heterogeneous effect of these schemes across the income distribution.
We depart from the above-­mentioned studies by applying the so-­called stress-­
testing approach to tax-­benefit systems in order to assess the impact on household
incomes of the COVID-­19 shocks and government responses at the onset of the
pandemic in Belgium, Italy, Spain and the UK. Our contribution is novel in that
we provide timely and meaningful cross-­country comparative evidence on the dis-
tributional impact of COVID-­19 and the governments’ policy responses, adopting
a fully individual micro-­level analysis comparable across countries.

2.1. Stress-­testing the Tax-­benefit Systems

The COVID-­19 pandemic and the containment measures created a sudden
economic shock with a direct impact on the labour market participation of indi-
viduals, and hence on household incomes. To inform policy learning, it is essential
to provide timely analysis to assess the success of the existing as well as emergency
tax-­benefit and earnings compensation schemes in protecting household incomes.
The fiscal literature refers to the first as automatic stabilizers and to the latter as

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Review of Income and Wealth, Series 68, Number 2, June 2022

discretionary policies (Paulus and Tasseva, 2020). Unfortunately, micro-­data on

household incomes during the pandemic will only become available with a few
years lag. To address this data limitation, we simulate labor market COVID-­19
shocks, and predict household incomes before and during the crisis, by combining
a tax-­benefit model with different sources of household micro-­and/or macro-­data.
Our method follows closely the approach to stress-­test the welfare state. Stress-­
testing is commonly used to assess the vulnerability of portfolios in financial insti-
tutions and the resilience of the financial systems to extreme, but plausible shocks
(Jones et al., 2004). Atkinson (2009) suggests extending the approach to tax-­benefit
systems to assess their resilience to major economic downturns. Stress-­testing can be
applied to assess the effects of either hypothetical or contemporary shocks for which
no household micro-­data are yet available. Thus, we follow the latter (contemporary
shocks) option and build on the work by Fernandez Salgado et al. (2014), who ana-
lyze the income compensation provided by the welfare state to newly unemployed
at the onset of the Great Recession. Bruckmeier et al. (2020) is a recent application
of the same approach implemented through a combination of data and models on
firm output expectations, labor demand and individual level policies.
For the individuals affected by the simulated shocks, we analyse how much of
the loss to their labor income is cushioned by the existing fiscal policies—­that is,
automatic stabilizers—­in each country in the form of: (a) income taxes and social
insurance contributions, (b) contributory benefits for those who lost their earnings,
(c) other means-­tested benefits and tax credits designed to protect families on low
income, and (d) other household incomes, in the form of earnings of those still in
work as well as capital incomes, pensions and benefits, received by other household
members. In addition, we capture the distributional effects of the new emergency
policies governments implemented to prevent the sudden fall in household income.
With our stress-­testing approach we focus exclusively on the loss of earnings
as one of the channels through which the COVID-­19 pandemic directly affects
individual well-­being and on the direct compensation provided by the tax-­benefit
system and earnings compensation schemes. We abstract from other potential
adaptive changes in individuals’ and their family members’ behavior and from gen-
eral equilibrium consequences in the short or long term. Thus, we assess the extent
to which the welfare system helps to stabilize household incomes across countries,
and whether there are specific weaknesses in the policy instruments in operation.

2.2. Counterfactual Scenario Derived Using EUROMOD

We make use of household micro-­data and a tax-­benefit microsimulation model
to estimate baseline household incomes, that is, before COVID-­19, and counterfac-
tual household incomes during the first month (i.e. April 2020) of the pandemic.
To derive our baseline scenario of the pre-­COVID-­19 income distribution, we
use household micro-­data from the Statistics on Income and Living Conditions
(SILC) for 2018 (with 2017 incomes) for Belgium, Italy and Spain and from the
Family Resources Survey (FRS) for 2018/19 for the UK. Both the SILC and FRS
include very rich information on individual and household characteristics and
incomes and are broadly representative of the national population before the onset
of the pandemic. The financial values of the income data are uprated to 2020 to

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Review of Income and Wealth, Series 68, Number 2, June 2022

account for the average growth in earnings and statutory indexation of public pen-
sions and disability benefits between 2017/2018 and 2020. We do not make any
adjustments for changes in the population composition between 2017/2018 and
2020. We then combine these data on gross (pre-­tax) market/original incomes with
the European tax-­benefit model EUROMOD which calculates for each individual/
household in the sample their social insurance contributions (SIC), income tax
liabilities and benefit entitlements, as well as their disposable income, based on the
2020 pre-­COVID-­19 tax-­benefit rules.
To the extent it is relevant in each country, EUROMOD baseline simula-
tions are corrected for income tax evasion (Italy) and benefits non-­take-­up (UK,
Belgium) and we assume there are no changes in the tax evasion and benefit take-­up
behavior as a consequence of the shock.
For more information on EUROMOD, see Sutherland and Figari (2013) and
the EUROMOD Country Reports (Assal et al., 2020 for Belgium; Ceriani et al.,
2020 for Italy; Navas-­Román and Villazán-­Pellejero, 2020 for Spain; and Reis and
Tasseva, 2020 for the UK) for the details on the policies simulated.
To derive our counterfactual scenario, we simulate employment and earnings
shocks to the workers in the SILC and FRS samples. These shocks resemble the
COVID-­19 shocks that occurred in the first month of lockdown in each country.
The shocks simulations are informed by the most up-­to-­date (at the time of writ-
ing) and detailed information on the labor market changes in each country, based
on: external micro-­data from the Corona Study for Belgium; information on the
economic sectors enforced to shut down by the national laws in Italy; the Labour
Force Survey and aggregate statistics from the social security registers for Spain;
the Understanding Society COVID-­19 Study for April 2020 for the UK. To simu-
late the shocks as accurately as possible, we apply somewhat different approaches
in each country, taking into account differences in the types of shock and available
data. Despite differences in the approaches, in all four countries we focus explicitly
on modeling changes to (self-­) employment and earnings and household incomes,
which allows us to draw consistent and meaningful cross-­country comparisons.
In more detail, we apply the following approaches to simulate the COVID-­19
labor market shocks:
In Belgium, we identify affected individuals by calculating the propensity
of workers to become temporary unemployed or to have to shut down their self-­
employment activities. The characteristics that define this propensity are derived
from an analysis of the Corona study, a survey that tracks the experiences of
households during the lockdown and its aftermath. The propensity is calibrated
against administrative data on the share of employees receiving a temporary unem-
ployment benefit or a bridging right for self-­employed in the month of April, by
sector, age group and gender. More details on the method used can be found in
Marchal et al. (2021).
In Italy, we identify workers in the economic sectors at 6-­digit ATECO level
that were listed in the Decree Law imposing the shutdown of economic activities.2
Although SILC microdata lack information on business activities at 6-­digit level,

2Decree Law of the Minister of Economic Development which updates the DPCM March 22, 2020

available here https://www.gazze​ttauf​ficia​le.it/eli/id/2020/03/26/20A01​877/sg.

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Review of Income and Wealth, Series 68, Number 2, June 2022

we draw on other detailed available statistics released by Istat—­namely, the operat-

ing firms archive (ASIA), the national labor force survey (RCFL) and National
Accounts—­in order to compute the occupation shares in each sector subject to
shut down. We then randomly select the individuals, with a positive income source
from either employment or self-­employment. We perform this selection by sector
of employment at 2-­digit ATECO level, which we relate to data in EUROMOD in
order to get the same occupation shares subject to the shutdown. Details can be
found in Figari and Fiorio (2020).
In Spain, we estimate the propensity of active male and female adults to
become unemployed using the 2018 Spanish Labour Force Survey (SLFS) by age,
education, civil status, household type, immigrant origin, activity status, industry
or sector, occupation and region. We use the estimated coefficients from the probit
model to predict the probability of an unemployment outcome for each employed
individual in the SILC sample and randomly assign each individual to one of the
outcomes (unemployment or employment) respecting these probabilities. We then
order individuals by sector and region and according to this random assignment
we are able to calibrate our numbers by the real impact of the shock using social
security registers for the months of March and April 2020 by sector (12 categories)
and region (7 categories). Moreover, we randomly select workers entering furlough
by sector of activity and region and calibrate against administrative data the share
of employees or self-­employed receiving a temporary unemployment benefit in the
month of April.
In the UK, we use data from the April 2020 wave of the Understanding Society
COVID-­19 Study (UKHLS hereafter) which contains information on individu-
als’ labor market status and earnings in February 2020 (before COVID-­19) versus
April 2020 (after COVID-­19). We first estimate two multinomial logit models on
the UKHLS data—­one on the sample of employees and another one on the sam-
ple of self-­employed, both with positive earnings in February 2020. The model for
employees has four outcomes: (1) out of work, (2) furloughed, (3) still employed
but with reduced hours and earnings, (4) still employed and with no drop in earn-
ings. Similarly, the model for self-­employed has three outcomes: (1) out of work,
(2) still self-­employed but with reduced hours and earnings, (3) still self-­employed
and with no drop in earnings. In both models, we control for a range of individual
and household-­level characteristics, including age, sex, industry, household type,
baseline earnings quintile/ventile groups and number of working hours in bands
by sex. We then take the estimated coefficients from the models and apply them
on the sample of FRS workers with positive earnings, to predict the probability
of each labor market outcome for each worker. We randomly assign each worker
to one of the outcomes, accounting for these predicted probabilities. For detailed
information on the approach and estimates from the multinomial logit models, see
Brewer and Tasseva (2021).
Finally, using EUROMOD, we apply the tax-­benefit rules as of April 2020
on the data with modified workers’ earnings to compute SIC, taxes, benefits, earn-
ings compensation schemes and household disposable incomes during the first
month of the COVID-­19 crisis. By comparing the baseline and counterfactual, we
estimate the impact on household incomes of the crisis and governments’ fiscal

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Review of Income and Wealth, Series 68, Number 2, June 2022

TABLE 1
Characteristics of those Affected by Earnings Losses

Belgium Italy Spain UK

Workers affected by earnings 30.28 28.88 19.85 37.46
losses %
Presence of children % 41.5 39.05 38.75 41.89
Number of earners in the
family %
1 31.75 40.73 26.77 24.22
2 56.11 44.15 51.65 54.09
3+ 12.14 15.11 21.59 21.69
Household income quintile %
Bottom 8.50 13.64 15.01 11.63
2nd 17.76 15.39 19.80 16.83
3rd 22.65 20.93 21.29 21.98
4th 25.44 24.74 23.11 25.82
Top 25.66 25.31 20.79 23.75
Notes: Summary statistics for those affected by earnings losses as identified in EUROMOD data.
Quintile groups based on equivalized household disposable income in the baseline.
Source: Own calculations with EUROMOD version I3.0+.

policies. We discuss the tax-­benefit and earnings compensation schemes in more

detail in Section 3.

2.3. The Characteristics of those Affected by Earnings Loss

The analysis focuses on employed and self-­employed individuals who lost (all
or part of) their earnings in the immediate aftermath of the COVID-­19 outbreak.
The proportion of workers simulated with earnings losses ranges from 20 percent
in Spain to around 30 percent in Belgium and Italy and 37 percent in the UK
(Table 1).
Around 40 percent of those affected by an earnings shock live in a family with
children, pointing to the need to have welfare systems that protect not only workers
but their dependent family members as well. Moreover, the share of those being the
only earner in the family is relatively high ranging from around 25 percent in Spain
and the UK to 32 percent in Belgium and 41 percent in Italy: for their families the
temporary shutdown of their activities implies the loss of the main income source.
The distribution of those affected by an earnings shock by household net
income quintile groups (assessed before the earnings loss) shows an increasing pat-
tern despite important differences across countries. There are relatively less individ-
uals affected in the first quintile in Belgium, the UK and Italy than in Spain where
the distribution across quintiles is more uniform.

2.4. Income Stabilization Indicators

Following Fernández Salgado et al. (2014), we focus on three indicators mea-
suring the relative and absolute resilience provided by the tax-­benefit policies and
earnings compensation schemes during the pandemic. These indicators are the Net
Replacement Rate, the Compensation Rate and changes to the Poverty Rate.

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Review of Income and Wealth, Series 68, Number 2, June 2022

The Net Replacement Rate is a measure of relative resilience and captures

the level of income stabilisation with respect to the baseline income (Immervoll
and O’Donoghue, 2004). It is computed on the sample of workers affected by the
shock and equals:
Ypost
Net Replacement Rate =
Ypre

where Ypre and Ypost are equivalized household disposable income in the baseline
and after the shock, respectively. Household disposable income is made up of the
sum of gross (pre-­tax) original income (i.e. earnings from (self-­)employment, pri-
vate pensions, private transfers, income from rent and investment income) and
public benefits minus taxes (i.e. income taxes plus SIC). To account for household
composition and economies of scale within the household, household incomes are
equivalized using the modified OECD equivalence scale (a value of 1 for the head,
0.5 for any other adult aged 14+ and 0.3 for each child aged <14).
To measure the level of income protection provided by the different policies,
we break down the Net Replacement Rate by income source:

Opost + Bpost − Tpost

Net Replacement Rate =
Ypre

where Opost, Bpost and Tpost are equivalized household original income, public ben-
efits and taxes, respectively, after the shock. We also break down further Bpost into
the different benefit types to show explicitly the contribution of (1) the earnings
compensation schemes, (2) unemployment benefits and (3) means-­tested and other
benefits (e.g. housing and social assistance benefits).
The Net Compensation Rate is another indicator of relative resilience which
captures the level of protection offered by fiscal policies. It is also computed on the
sample of workers affected by the COVID-­19 shocks and measures the proportion
of net earnings lost due to the crisis, compensated by public benefits net of taxes,
as follows:
( ) ( ∗ ∗
)
Bpost − Bpre − Tpost − Tpre
Net Compensation Rate = ( ) ,
∗
Epost − Epre
∗

where Bpost and Bpre are equivalized household public benefits, Tpost∗ and Tpre
∗ are

taxes liable on the worker’s own earnings and Epost and Epre are the worker’s earn-
∗ ∗

ings net of taxes, respectively, after and before the shock. Thus, the denominator
captures the loss in net earnings due to the shock, while the numerator shows
how much of this loss is absorbed by more generous benefit entitlements and/or
lower taxes. The Net Compensation Rate allows us to isolate the net government
support, abstracting from the income insurance provided by the gross original
income of other household members. As with the Net Replacement Rate, we
break down further the Net Compensation Rate to show the contribution of
benefits by type.

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Review of Income and Wealth, Series 68, Number 2, June 2022

Our indicator of absolute resilience is the change in the Poverty Rate due to
the shock measured against a fixed poverty threshold, that is, 60 percent of the
median baseline equivalized household disposable income. We look at poverty
changes among different subgroups (workers affected by the shock and children)
versus the total population. Our approach of using a poverty threshold fixed to
the baseline income distribution follows the suggested practice to measure pov-
erty during an economic downturn with a poverty line fixed in real terms (Jenkins
et al., 2013). It allows to capture the drop in living standards that individuals face,
by comparing their current circumstances with their situation before the income
shock (Matsaganis and Leventi, 2011). A normative judgment about the appropri-
ate level of income protection provided by the welfare state is beyond the scope of
this paper (Boadway and Keen, 2000). Nevertheless, given the overarching policy
objective of limiting the number of individuals at risk of poverty, it is implicit that
household incomes should not fall below the poverty threshold as a result of the
crisis.
Finally, when interpreting the results, it should be noted that our main
indicators—­the Net Replacement Rate, Compensation Rate and changes to the
Poverty Rate among workers affected by the shock—­are estimated for the group of
workers affected by the COVID-­19 shocks only and thus, results are not affected
per se by the number of individuals affected by the shocks. In comparison, the pro-
portion of affected workers matters for total population estimates of the budgetary
costs and changes to income poverty and inequality.

3. Income Protection Policies During COVID-­19

The existence in all European countries of a developed welfare state, that is
intended, among other things, to protect people and their families against eco-
nomic shocks, is one of the main differences between the crisis faced today and that
of the 1930s. However, the sudden and unexpected shock due to the COVID-­19
pandemic forced European governments to adapt existing measures and to define
new discretionary and bold measures to support those who are bearing a dispro-
portionate share of the economic burden (OECD, 2020a).
Table 2 provides a summary of the most important measures implemented in
April 2020 in our selection of countries. All four countries took similar provisions
to safeguard incomes of employees, though the design, size and scope is somewhat
different. In what follows we refer to “Earnings Compensation Schemes” to iden-
tify the different instruments (i.e. furlough schemes and subsidies to self-­employed)
in place in each country to protect employment and self-­employment incomes
(Konle-­Seild, 2020).
Starting with the provisions for employees, the most important measure in
Belgium was the extension of access to the so-­called system of temporary unem-
ployment to all employees (“Tijdelijke werkloosheid COVID-­19,” a furlough-­type
measure); previously, the system was only accessible for economic conditions or
under “force majeure,” but under COVID-­19 a much broader definition was applied
and the application procedure was considerably simplified, causing most employ-
ees from impacted employers to be eligible. Benefit generosity was increased on

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303
 TABLE 2
Governments Responses to the COVID-­19 Pandemic (Simulated Policies Only)

Belgium Italy Spain United Kingdom

Earnings compensation schemes—­employees
Temporary unemploy- Temporary unemployment ben- Temporary unemployment ben- Coronavirus Job Retention Scheme
ment benefit [Tijdelijke efit [CIG = Cassa Integrazione efit [ERTE = Expediente de
werkloosheid—­COVID-­19] Guadagni] Regulación Temporal de Empleo]
Existing scheme extended to all Existing scheme extended to most Existing scheme New scheme
employees employees
Up to 70% with min and max Up to 80% with max (€1,130) Up to 70% with min and max Up to 80% with max (£2,500)
(€2,084) (€1,411)
Earnings compensation schemes—­self-­employed
Bridging right [Tijdelijke crisis- Lump sum transfer [Bonus €600] Temporary unemployment benefit n/a
maatregel overbruggingsrecht] [Prestación extraordinaria por
cese de actividad COVID-­19].
Existing scheme extended New scheme New scheme
Lump-­sum benefit (€1,262/ €1,614) Lump sum benefit (€600) Up to 70% with min and max

304
(€1,411)
Unemployment benefits
Contributory unemploy- Ban for firms to lay off employees Contributory unemployment Contributory unemployment ben-

International Association for Research in Income and Wealth

Review of Income and Wealth, Series 68, Number 2, June 2022

ment benefit for employees benefit for employees [Prestación efit for employees [contribution-­
[Werkloosheidsverzekering] por desempleo] based Jobseeker’s Allowance]
Contributory unemployment ben-
efit for self-­employed [Prestación
económica cese de actividad de
trabajadores autónomos]
Other schemes
Social assistance benefit Lump sum transfer (€100) to Universal Credit (main allowances
[Leefloon—­Recht op maatschap- employees working at their firms’ increased by £20 per week, rent
pelijke Integratie] premises component increased); Working
Tax Credit (main allowances
increased by £20 per week),
Housing Benefit (increased,

© 2021 The Authors. Review of Income and Wealth published by John Wiley & Sons Ltd on behalf of
earnings disregard increased
by £20 per week), Council Tax
Reduction (earnings disregard
increased by £20 per week)
Notes: Authors’ elaborations based on national legislation. See the EUROMOD Country Reports for details.
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Review of Income and Wealth, Series 68, Number 2, June 2022

the one hand by raising the replacement rate from 65 percent to 70 percent of the
previous monthly wage (with lower and upper bounds) and on the other hand by
providing a daily supplement of €5.63. The daily benefit ranges from a minimum
of €55.59 up to a maximum €74.71, and is paid according to a 6-­day work week.
In April a withholding tax of 26.75 percent was applied at source. Alternatively,
unemployed workers can get the existing contributory unemployment benefit.
To compensate the earnings loss suffered by the employees in Italy, the govern-
ment extended with the Decree Law 18/2020 (“Cura Italia”) the existing furlough
scheme (i.e. Cassa Integrazione Guadagni, CIG) relaxing the eligibility conditions
and allowing most of employees to be entitled to the scheme. Only domestic work-
ers and consultants (i.e. parasubordinati) are not eligible. The wage compensation
scheme provides a replacement of 80 percent of earnings subject to a maximum
cap: if monthly earnings are below €2,160, CIG cannot exceed €940, while if earn-
ings are above the threshold the CIG is capped at €1,130. This implies that in prac-
tice the replacement rate can be substantially below 80 percent for most workers.
Transfer payments are subject to income taxes. The same Decree Law imposes
that firms cannot fire employees after February 23, 2020: this implies that existing
Unemployment Insurance Schemes do not apply to the generality of workers but
only to those with temporary contracts that reach the end during the COVID-­19
pandemic.
In Spain, the Contributory Unemployment benefit (Prestación por desempleo)
and the Temporary unemployment subject to administrative approval (Expediente
de Regulación Temporal de Empleo, a furlough-­type measure) also provide pro-
tection through a replacement rate of 70 percent with lower and upper bounds.
Similarly to the Belgian case, this temporary unemployment system was already
in place but was only accessible for economic conditions or under “force majeure,”
but under COVID-­19 a much broader definition was applied and the application
procedure was considerably simplified, causing most employees from impacted
employers to be eligible. The benefit can range between €502 and €1,411 per month.
To support business and workers in the UK, the government introduced a new
Coronavirus Job Retention Scheme to subsidize earnings of furloughed employees.
The scheme allows employers to reduce employees’ working hours to zero, without
laying employees off and thus, reducing the costs of searching and re-­hiring work-
ers later on. In April 2020, this scheme pays 80 percent of gross earnings up to a
maximum of £2,500 per month. In the case of a job loss, employees who have pre-
viously paid SIC are entitled to the contributory unemployment benefit Jobseeker’s
Allowance (JSA).
Belgium, Italy and Spain also set up provisions for the self-­employed (the UK
Self-­employment Income Support Scheme was introduced from May 12 onwards
and is hence not considered in this analysis3). In Belgium this was done through an
extension of access to the so-­called bridging right (“Overbruggingsrecht”). It entails
a lump-­sum transfer of €1,291.69 and €1,614.10 per month for self-­employed with-
out and with dependent family members, respectively. Amounts are halved for

3Analyzing changes in household incomes in April–­ May 2020 in the UK, Brewer and Tasseva
(2021) find that the Self-­Employment Income Support Scheme has a limited positive effect on house-
hold incomes, of 1.3 percent on average.

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Review of Income and Wealth, Series 68, Number 2, June 2022

those self-­employed whose activity is a secondary one and whose yearly income
ranges between €6,996.89 and €13,993.77. To compensate the earnings loss incurred
by the self-­employed in Italy, the government defined a new lump-­sum transfer of
€600 to be paid for the month of March to all self-­employed, irrespective of
whether they incurred a loss or not. The self-­employed in specific professional bod-
ies (e.g. lawyers, accountants, notaries, etc.) are eligible for the lump-­sum transfer
only if their 2019 income was below €35,000. The transfer is not subject to income
tax and does not enter in any means-­test of other benefits. In Spain a contributory
unemployment benefit for the self-­employed was already in place since November
2010. The Spanish government however, set up additional provisions for the self-­
employed through a temporary unemployment benefit linked to the COVID-­19
crisis. This benefit has the aim to protect earnings of those self-­employed who did
not have enough contributions (12 months prior to shock) to be eligible for the
contributory unemployment benefit. Both benefits provide protection through a
replacement rate of 70 percent with lower and upper bounds.
In Italy, employees bound to continue work on company premises and those
who cannot typically work from home are entitled to a lump-­sum transfer of €100
to be paid for the month of March. Estimates show that 50 percent of employees
working in the economic sectors that are not subject to the shutdown still work on
company premises (Fondazione Studi Consulenti del Lavoro, 2020). The transfer
is not subject to income tax and does not enter in any means-­test of other benefits.
With the exception of income tax liabilities, which are expected to go down
due to the lower level of earnings, the rest of traditional automatic stabilizers
embedded in the tax-­benefit systems operate in a different way across countries.
SIC paid by employees and self-­employed fall because of the losses to earn-
ings and because either they are calculated based on the amount of benefits replac-
ing lost earnings by less than 100 percent as in the UK or because they are credited
by the government (and as such not accounted for in this analysis) as in Belgium
and Italy. The exception is Spain where only employer SIC are credited by the
government and workers are still paying contributions on the same base as with
previous earnings.
The existing income-­tested benefits in Italy (i.e. the bonus IRPEF, Family
allowances and the Citizenship income) and Spain (i.e. the Regional minimum
income schemes—­Rentas Mínimas) are based on the income and means-­test of the
previous fiscal year—­or at least previous months—­and thus, do not react immedi-
ately to the loss of earnings households experienced in April 2020. In contrast, in
the UK, entitlements to the income-­tested benefits are calculated based on “cur-
rent” incomes and circumstances, allowing them to compensate families immedi-
ately for the income losses. In addition to accessing the unemployment benefit JSA,
low-­income families and/or unemployed individuals can receive support from the
main means-­tested benefit Universal Credit (UC) which consists of a standard
allowance and additional allowances depending on the person’s and their family’s
circumstances. Before COVID-­19, UC and JSA paid the same amount to single
individuals aged 25+ of £323 per month. In response to the pandemic, the UK
government increased UC standard allowance by £20 per week which was a signif-
icant increase in relative terms of 28 percent for singles aged 25+ and 17 percent
for couples. Access to UC for self-­employed was also relaxed. The UC allowance

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Review of Income and Wealth, Series 68, Number 2, June 2022

which supports families paying their rent and Housing Benefit (HB) were made
more generous by increasing the Local Housing Allowance Rates used to calculate
benefit entitlements. Income support is also provided to low-­income families by
other means-­tested benefits such as Working Tax Credit (WTC) and Council Tax
Reduction (CTR). The basic allowance of WTC was increased by £20 per week in
line with UC. Finally, the earnings disregard for HB and CTR was increased mak-
ing benefits more generous. Noteworthy, the increased benefit generosity in the UK
will have an impact not only on the incomes of families affected by the COVID-­19
shocks but also on those already claiming benefits prior to the pandemic. In
Belgium, no changes occurred to the means-­tested social assistance benefit scheme
in the immediate aftermath of the lockdown. Eligibility to the benefit depends on
current need (and assets). In principle, social assistance can act as a top-­up to those
who saw their income decrease under the social assistance threshold.
In addition to the policies listed in Table 2, other policy changes have been
introduced, but these are not included in the analysis mainly due to data unavail-
ability. Examples of these are: in Belgium the degressivity of unemployment ben-
efits was suspended. In Italy, the government allowed employees in the private
sector with children up to 12 years old to take parental leave for 15 days at 50
percent of the earnings’ level or, alternatively, to have a babysitting bonus of €600
(incremented to €1,000 for those working in the health system). In Spain, there was
rent payment help, as well as an extra subsidy for domestic workers and temporary
workers. In addition, we do not consider the suspension of mortgage payments on
the main residence in Belgium, Italy and Spain because these policies involve only a
change in the timing of payment with potential effects on lower than usual interest
rates for these payments.

4. Budgetary Effects and Distributional Changes

We first show the simulated fiscal cost of the main income protection schemes
acting in each country at the onset of the pandemic. We then assess the impact
of COVID-­19 and the policy responses on household gross (pre-­tax) original and
disposable income and the share of gainers and losers, on average for the whole
population and by income quintile groups of pre-­COVID-­19 incomes. Finally, we
analyze the impact of the crisis on income inequality.
Table 3 reports the simulated costs and the number of entitled individuals for
each policy measure compared with the available figures from administrative sta-
tistics. Several caveats need to be considered as the comparison between simulated
and administrative figures is particularly challenging due to the lack of availability
of administrative figures at the same detailed level and for the same time period as
considered in the paper, that is, April 2020. Nevertheless, this comparison of the
available figures shows the generally high level of external validity of our simula-
tions, in particular related to the main simulated instruments.
Overall the resources dedicated to compensate income losses of individuals
and families for the first month of the pandemic crisis ranged from 0.30 percent of
annual GDP in Spain to 0.51 percent in the UK, showing large disparities in the

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Review of Income and Wealth, Series 68, Number 2, June 2022

TABLE 3
External Validity of Simulations

Simulations Administrative Data

Cost Entitled Cost Entitled

% of Annual
Country and Policy Billions GDP Thousands Billions Thousands
Belgium
Earnings compen- 1.3 0.26 1,117 1.3 1,170
sation scheme—­
employees
Earnings compen- 0.4 0.08 278 0.57 405
sation scheme—­
self-­employed
Italy
Earnings compen- 4.8 0.27 5,566 n.a. 5,500
sation scheme—­
employees
Earnings compen- 1.9 0.11 3,230 2.4 3,955
sation scheme—­
self-­employed
Lump sum transfer 0.6 0.03 5,968 n.a n.a.
(€100)
Spain
Earnings compen- 2.4 0.20 2,788 2.5 2,381
sation scheme—­
employees
Earnings compen- 0.7 0.06 1,036 1.233 1,138
sation scheme—­
self-­employed
Unemployment 0.5 0.04 424.6 n.a. n.a.
benefit—­
employees
Unemployment 0.04 0.00 57.3 n.a. n.a.
benefit—­self-­
employed
UK
Earnings compen- 10.4 0.46 7,305 n.a. 8,787
sation scheme—­
employees
Unemployment 0.2 0.01 0.6 n.a n.a.
benefit
Universal Credit 0.9 0.04 5,380 n.a. 5,260
Notes: Costs and entitlements refer to 1-­month payments (April 2020). Amounts are expressed in
€/EUR in Belgium, Italy and Spain; in £/GBP in the UK. GDP for 2019 based on Eurostat data (on-
line data code: TEC00001). “Earnings compensation scheme—­” includes Temporary unemployment in
Belgium, CIG and lump sum benefit in Italy, ERTE in Spain, Coronavirus Job Retention Scheme in the
UK. “Earnings compensation scheme—­self-­employed” includes Bridging right in Belgium, Lump sum
transfer in Italy, Temporary unemployment for self-­employed in Spain. In the UK, the simulated num-
ber of entitled to the “Earnings compensation scheme—­employees” refers to the number of furloughed
employees, while the administrative data refers to the number of employments.
Source: Simulations based on own calculations with EUROMOD I3.0+. Administrative data from
different national sources. Details available from the authors upon request.

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Review of Income and Wealth, Series 68, Number 2, June 2022

resources allocated in response to the crisis, but in line with differences in the share
of workers affected by the labor market shocks as shown in Table 1.
Across countries the measures that absorbed most resources are the earnings
compensation schemes for employees, followed by the new instruments introduced
to sustain self-­employed incomes. Substantial resources were also devoted to the
increased generosity of the existing means-­tested benefits in the UK and to the
payment of contributory unemployment benefits in Spain.
Overall, the 1-­month shutdown at the beginning of the COVID-­19 crisis
implied a loss of original income of around 0.51 percent of annual GDP (€6 bil-
lion) in Spain, 0.64 percent (€3 billion) in Belgium, 0.89 percent (€16 billion) in
Italy and 0.96 percent (£22 billion) in the UK. With such a loss of original income,
governments lost substantial amounts of income tax revenue and SIC (including
both employer and employee contributions) which act as automatic stabilizers,
reducing their financial burden on the individuals who experienced an income loss.
The main exception is represented by Spain where workers, while receiving the
benefits, continued paying SIC calculated on the previous “contribution base” as
defined while at work. Despite additional resources transferred as state benefits

TABLE 4
Income Changes Due to COVID-­19 and Governments’ Policy Responses

Income Source Billions % of Annual GDP % Change

Belgium
Original income −3.0 −0.64 −18.39
SIC: employer −0.5 −0.12 −15.36
SIC: employee and self-­employed −0.4 −0.09 −19.09
Income tax −0.4 −0.08 −8.22
State benefits 1.7 0.35 25.76
Disposable income −0.6 −0.12 −3.67
Italy
Original income −15.9 −0.89 −25.97
SIC: employer −3.4 −0.19 −25.96
SIC: employee and self-­employed −1.7 −0.09 −25.87
Income tax −2.8 −0.15 −16.19
State benefits 8.0 0.45 27.84
Disposable income −3.4 −0.19 −5.15
Spain
Original income −6.3 −0.51 −15.66
SIC: employer −1.5 −0.12 −15.60
SIC: employee and self-­employed −0.1 −0.01 −3.54
Income tax −0.8 −0.06 −10.90
State benefits 3.6 0.29 25.41
Disposable income −1.8 −0.15 −4.11
UK
Original income −21.8 −0.96 −23.53
SIC: employer −0.9 −0.04 −13.34
SIC: employee and self-­employed −1.1 −0.05 −13.97
Income tax −2.5 −0.11 −14.21
State benefits 11.7 0.52 68.3
Disposable income −6.5 −0.29 −7.65
Notes: Estimates for income changes are based on non-­equivalized incomes and refer to 1-­month
(April 2020) shutdown. SIC = Social Insurance Contributions. Amounts are expressed in €/EUR in
Belgium, Italy and Spain; in £/GBP in the UK. GDP for 2019 based on Eurostat data (online data
code: TEC00001).
Source: Own calculations with EUROMOD I3.0+.

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Review of Income and Wealth, Series 68, Number 2, June 2022

Figure 1. Income Changes Due to COVID-­19 and Governments’ Policy Responses, by Household
Income Quintile Groups

Notes: Changes (in %) in equivalized household original and disposable income due to COVID-­19
and governments’ policy responses. Income quintile groups are based on the pre-­COVID-­19 distribution
of equivalized household disposable income. Source: Own calculations with EUROMOD I3.0+.
[Colour figure can be viewed at wileyonlinelibrary.com]

ranging from 0.29 percent of annual GDP in Spain to 0.52 percent in the UK,
the loss of disposable income for families was between 4 percent and 5 percent of
the disposable income before the shock in Belgium, Italy and Spain and around 8
percent in the UK (Table 4).
Next, Figure 1 shows the percentage change in average original and disposable
income due to the crisis with respect to the baseline (pre-­COVID-­19), for the whole
population as well as by quintile groups of pre-­COVID-­19 household incomes. A
negative (positive) change means a loss (gain) to income. On average for the whole
population, in all four countries both original and disposable income fell substan-
tially, with the loss to original income being several times larger than the loss to
disposable income. The drop to original income ranged from 16 percent in Spain to
26 percent in Italy while the drop to disposable income was from around 4 percent
in Belgium and Spain to 6 percent in Italy and 8 percent in the UK.
Along quintiles groups, we see the unequal distribution of income losses.
Consistently across countries, original income losses were more pronounced at the
bottom of the distribution. This is in part due to the fact that one-­earner families
are more concentrated at the bottom of the distribution and the pandemic caused
the loss of their main source of original income. Along the income distribution,
families are characterised by more earners and other income sources (e.g. property

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Review of Income and Wealth, Series 68, Number 2, June 2022

Figure 2. Income Gainers and Losers Due to COVID-­19 and Governments’ Policy Responses, by
Household Income Quintile Groups

Notes: Loss/gain measured as the % change in equivalized household disposable income due to
COVID-­19 and governments’ policy responses. Income quintile groups are based on the pre-­COVID-­19
distribution of equivalized household disposable income. Source: Own calculations with EUROMOD
I3.0+. [Colour figure can be viewed at wileyonlinelibrary.com]

and capital income) which acted as self-­insurance. On average, those in the first
(poorest) quintile group lost 36 percent of their original income in the UK, around
30 percent in Belgium and Italy and 21 percent in Spain. In comparison, those in
the top (richest) quintile group lost 24 percent in Italy, 19 percent in the UK, 15
percent in Belgium and 13 percent in Spain.
In contrast to original income, changes in disposable income had the opposite
pattern, with the largest losses at the top of the income distribution in all four
countries, of around 10 percent in Italy and the UK and 5 percent in Belgium and
Spain. In the bottom quintile, we find a small loss to disposable income of around
1 percent in the UK, no change in Belgium and Spain and a small income gain of
3 percent in Italy. Overall and across the distribution, disposable income fell by less
than original income because of the protection of tax-­benefit policies which offset
the large falls in earnings. We explore this in more detail in Section 5.
Figure 2 reports the share of individuals who experienced a loss or gain in
household disposable income in the first month of the pandemic, for the whole
population as well as by quintile of pre-­COVID-­19 household disposable income.
We look at individuals with losses or gains of 1 percent–­10 percent, 10 percent–­30
percent, 30 percent–­50 percent, 50 percent–­70 percent and more than 70 percent
of baseline (pre-­COVID-­19) disposable income. With the exception of Italy, the
share of losers due to the crisis was larger than the share of gainers. In Italy, there

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Review of Income and Wealth, Series 68, Number 2, June 2022

TABLE 5
Income Inequality: Gini Index

Country Pre-­COVID-­19 Post-­COVID-­19

Belgium 0.225 0.223
(0.004) (0.004)
Italy 0.326 0.332
(0.003) (0.003)
Spain 0.322 0.320
(0.003) (0.003)
UK 0.309 0.306
(0.003) (0.003)
Notes: Income inequality based on equivalized household disposable income. Post-­COVID-­19
r­ efers to income inequality in April 2020. Bootstrapped standard errors after 200 replications are shown
in parenthesis.
Source: Own calculations with EUROMOD I3.0+.

were slightly more gainers than losers, but this was primarily due to a large group
of individuals with a small gain of disposable income of between 1 percent and 10
percent. Excluding this group, there were more losers than gainers with an absolute
income change of more than 10 percent.
Looking across the income distribution, in all countries there was a larger
share of losers in the top three quintile groups than in the bottom two quintiles.
The share of losers with losses of more than 30 percent was also higher in the mid-
dle/top than at the bottom of the distribution in Belgium and the UK. In Italy and
the UK, there was also a substantial number of gainers. In Italy this was mainly
due to the bonus of €100 distributed to all employees working at the firms’ prem-
ises. In the UK, the presence of gainers (with gains of 1 percent–­10 percent in the
bottom three quintiles and of 10 percent–­30 percent in the first quintile) was due
to the increased generosity of means-­tested benefits.
Despite these relevant and pronounced income changes at the top of the dis-
tribution, that also hid re-­rankings as individuals moved along the distribution due
to the loss in their earnings, the Gini index based on disposable income was not
statistically significantly different before and after the crisis in all countries but in
Italy where we observe a non-­negligible increase in inequality (Table 5).
We also estimate the Atkinson index of inequality (with aversion parameter
of 1) pre-­and post-­COVID-­19 and decompose it into within and between group
inequality (Table 6). Within group inequality here is the weighted sum of inequal-
ity within ventile groups of household disposable income. Between group inequal-
ity captures inequality between ventile groups if each person had the mean income
in the ventile they belonged to. Consistent with the results on Gini, we estimate
that only in Italy the Atkinson index increased slightly. Decomposing the index by
ventile groups, not surprisingly we find that most of inequality across countries is
explained by between group rather than within group inequality. In all four coun-
tries, within group inequality increased while between group inequality went down
(in Italy the increase in the former was only partly offset by the decrease in the lat-
ter, explaining the overall rise to inequality). The increase in within group inequal-
ity was due to the asymmetric nature of the crisis: people’s incomes within ventiles

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Review of Income and Wealth, Series 68, Number 2, June 2022

TABLE 6
Income Inequality: Atkinson Index

Country Pre-­COVID-­19 Post-­COVID-­19

A(1) Within Between A(1) Within Between
Belgium 0.089 0.008 0.082 0.087 0.013 0.075
(0.004) (0.002) (0.003) (0.005) (0.002) (0.003)
Italy 0.176 0.011 0.167 0.186 0.05 0.143
(0.003) (0.001) (0.003) (0.003) (0.002) (0.003)
Spain 0.175 0.006 0.169 0.171 0.019 0.155
(0.004) (0.001) (0.004) (0.004) (0.001) (0.004)
UK 0.152 0.01 0.143 0.15 0.029 0.125
(0.003) (0.001) (0.002) (0.003) (0.002) (0.002)
Notes: Groups based on ventile groups of equivalized disposable income. A(1) refers to Atkison
index with parameter alfa of inequality aversion set to 1. Bootstrapped standard errors after 200 repli-
cations are shown in parenthesis.
Source: Own calculations with EUROMOD I3.0+.

became more heterogeneous depending on whether they were hit by the shock, how
much income protection they received from the state, how many earners and what
other incomes there were in the household. In contrast, the reductions to house-
hold disposable income which were largest for previously higher-­income families
compressed the income distribution and reduced between group inequality.
Empirical evidence reported by Clark et al. (2020) and based on panel data
from the COME-­HERE survey on five European countries shows that the pattern
of inequality in Europe during the pandemic can be divided in two periods: since
the beginning of the crisis up to May 2020 relative inequality slightly increased—­on
average across countries and in particular in Italy consistently with our results—­
before dropping back to pre-­COVID levels in September 2020.

5. Relative and Absolute Resilience

This Section assesses welfare resilience at the onset of the pandemic. To
measure relative resilience, we estimate the Net Replacement Rates and Net
Compensation Rates which capture the contribution of the tax-­benefit systems
and household composition to income protection. To assess absolute resilience,
we look at changes in the poverty rates. For more details on the measures, see
Section 2.4.

5.1. Net Replacement Rate

The average Net Replacement Rate is illustrative of the relative welfare resil-
ience which differed across countries due to differences in tax-­benefit systems,
characteristics of the individuals affected by the shutdown and household com-
position. Estimated on the sample of workers affected by the COVID-­19 shocks,
Figure 3 shows the Net Replacement Rate (depicted as a black circle) for the whole
sample as well as by quintile groups of pre-­crisis disposable income. The Net
Replacement Rate is also broken down by income component (shown in bars), to

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Review of Income and Wealth, Series 68, Number 2, June 2022

Figure 3. Decomposition (by Income Sources) of Net Replacement Rate for those Affected by
COVID-­19, by Household Income Quintile Groups

Notes: The Net Replacement Rate is the ratio between household disposable income after and
before the COVID-­19 shocks, estimated on the sample of families affected by the shocks. All population
income quintiles based on the pre-­COVID-­19 distribution of equivalized household disposable income.
Source: Own calculations with EUROMOD I3.0+. [Colour figure can be viewed at wileyonlinelibrary.
com]

show the separate contribution of: the earnings compensation schemes; unemploy-
ment benefits; means-­tested and other benefits; original income; and income tax
+ SIC (with the latter two reducing the Net Replacement Rates and hence shown
to be negative).
Looking at the overall Net Replacement Rate, Figure 3 shows that household
disposable income on average is simulated to have fallen to 87 percent of its pre-­
shock level in Belgium, 82 percent in Spain and 78 percent in the UK. In Italy the
Net Replacement Rate was the lowest of 69 percent, on average. Breaking down the
Net Replacement Rate by income source highlights the large contribution and pro-
tective role of original income (i.e. earnings of other household members as well as
other types of original income other than earnings) and the earnings compensation
schemes in all countries. Post-­crisis original income (light grey bars) accounted for
30 percent of pre-­crisis disposable income in Italy, 43 percent in Spain, 55 percent
in the UK, and substantial 67 percent in Belgium; while the earnings compensa-
tion schemes (light rose bars) amounted to 31 percent–­36 percent across countries.
Unemployment benefits (in darker blue) in Spain and Italy and means-­tested and
other benefits (in lighter blue) in all four countries also contributed to protecting
household incomes against the shocks, overall replacing 10 percent to 25 percent of
pre-­crisis incomes. Income tax + SIC (in dark grey), as by design, reduced after-­tax

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Review of Income and Wealth, Series 68, Number 2, June 2022

incomes and accounted for −12 percent of pre-­crisis incomes in Italy, −18 percent
in Spain, −21 percent in the UK and −29 percent in Belgium.
Along the income distribution, Net Replacement Rates were higher at the
bottom than in the middle and top of the distribution. In Belgium and Spain, in
the first quintile group the Net Replacement Rate was about 1, meaning that on
average the poorest households did not see a change to their disposable income.
Across quintile groups, earnings of other household members (and income
sources not affected by the economic shutdown as capital and property income)
were progressively more important as household income increases: the Net
Replacement Rates are likely to have been pushed up by the presence of these
incomes at the top of the income distribution, but this was partly compensated by
progressive income tax + SIC.
Earnings compensation schemes introduced in the different countries
accounted for a substantial share of post-­shock household income across all quin-
tiles, with a larger contribution at the bottom than the rest of the distribution in
Belgium, Spain and Italy and somewhat equal contribution across the first four
quintiles in the UK. In all four countries, due to the cap on earnings replacement,
earnings compensation schemes protected incomes in the richest quintile the least.
Income from means-­tested benefits and other transfers (i.e. mainly pensions
and disability benefits) played a smaller but important role at the bottom of the
distribution mostly in Belgium and the UK, due to relative generous social assis-
tance benefits and Universal Credit, respectively. In Spain, and to a lesser extent in
Italy, an important share of family income was protected by unemployment bene-
fits, whose impact depended on both the generosity of the schemes and number of
unemployed people entitled to receive them, already higher in Italy and Spain than
in other countries before the crisis.
The general lesson of our analysis is that it is necessary to consider the social
protection system as a whole and how it interacts with household composition and
incomes received by other household members which act as self-­insurance mech-
anisms. Focussing exclusively on the new emergency measures does not provide a
comprehensive picture of what happened to household incomes.

5.2. Net Compensation Rate

To focus on the income protection offered by public support, we now look at
the Net Compensation Rate indicator. It measures the proportion of net earnings
lost due to the crisis, compensated by state benefits net of income tax + SIC. As
with the Net Replacement Rate, it is estimated on the sample of workers affected
by the COVID-­19 shocks. Similar to Figures 3 and 4 shows the Net Compensation
Rate for those affected by the shock as well as by income quintile groups (depicted
by the black diamond). The Net Compensation Rate is then broken down by
income source (in bars): earnings compensation schemes; unemployment benefits;
means-­tested and other benefits; original income; and income tax + SIC.
Figure 4 shows that the average net public contribution to disposable income
as a proportion of the net earnings lost because of the shock was the highest in
Belgium with 68 percent, 64 percent in Spain, 62 percent in Italy and 61 percent the
UK, with a decreasing pattern along the income distribution.

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Review of Income and Wealth, Series 68, Number 2, June 2022

Figure 4. Decomposition (by Income Sources) of Net Compensation Rate for those Affected by
COVID-­19, by Household Income Quintile Groups

Notes: The Net Compensation Rate measures the proportion of net earnings, lost due to the
COVID-­19 crisis, compensated by state benefits net of income tax + SIC, estimated on the sample of
families affected by the COVID-­19 shocks. All population income quintile groups are based on the pre-­
COVID-­19 distribution of equivalized household disposable income. Source: Own calculations with
EUROMOD version I3.0+. [Colour figure can be viewed at wileyonlinelibrary.com]

Most public support was channeled through the earnings compensation

schemes (light rose bars) only slightly reduced by the income tax + SIC (grey bars)
payable on some of these benefits. These schemes made up the largest share of
public support at the bottom of the distribution but also provided a relatively large
compensation for those in the upper part of the distribution. Families in the top
quintile groups benefited relatively less than other quintiles as the amount of these
schemes is capped at a maximum level in all countries, although the cap is much
higher in the UK than in the other countries. In Italy and Spain other schemes
are characterized either by a lump-­sum transfer (bonus €600 in Italy) or a mini-
mum level (€502 for the temporary unemployment benefit) which increased their
progressivity. Their support was less evident in the UK for the individuals at the
bottom of the distribution who, however, received support from Universal Credit
and other existing means-­tested benefits. In Spain, around 20 percent of earnings
lost was replaced by unemployment benefits, which were relatively more important
at the bottom than in the rest of the distribution.

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Review of Income and Wealth, Series 68, Number 2, June 2022

TABLE 7
Poverty Rates Before and After the Onset of the COVID-­19 Pandemic

Individuals Affected by the Shock

Individuals Affected by the Shock in One Earner Family
Country Pre-­COVID-­19 Post-­COVID-­19 Pre-­COVID-­19 Post-­COVID-­19
BE 4.73 9.68 11.30 26.70
(0.516) (0.893) (1.439) (2.419)
ES 16.24 21.68 21.98 37.13
(0.993) (1.196) (2.194) (2.343)
IT 13.64 30.91 23.08 49.75
(0.585) (0.832) (1.139) (1.230)
UK 9.10 18.15 26.01 40.16
(0.424) (0.662) (1.164) (1.257)
All individuals Children
Country Pre-­COVID-­19 Post-­COVID-­19 Pre-­COVID-­19 Post-­COVID-­19
BE 12.61 13.78 12.34 14.16
(0.604) (0.641) (1.228) (1.306)
ES 21.06 22.17 26.31 28.05
(0.596) (0.609) (1.137) (1.142)
IT 20.06 23.57 26.13 32.55
(0.442) (0.466) (0.931) (0.984)
UK 16.46 18.78 21.39 24.48
(0.367) (0.392) (0.738) (0.749)
Notes: Poverty rates based on equivalized household disposable income. The poverty threshold is
fixed at 60 percent of the baseline (pre-­COVID-­19) median equivalized household disposable income.
Bootstrapped standard errors after 200 replications are shown in parenthesis.
Source: Own calculations with EUROMOD I3.0+.

5.3. Poverty Rates

The extent to which the tax-­benefit instruments allow those affected by an
earnings shock to avoid falling below a given level of income depends on the gen-
erosity of the system, whether workers are entitled to receiving earnings compen-
sation schemes, the income position of the individuals before losing their earnings
and their household circumstances.
Table 7 shows the poverty rates, for different groups of the population before
the onset of the COVID-­19 pandemic and after the shutdown considering the poli-
cies introduced by the governments. The poverty line is kept constant at 60 percent
of the median equivalized household net income in the baseline scenario before
the pandemic.
In all four countries, living standards deteriorated due to the COVID-­19 crisis
with a large number of workers affected by the labor market shocks falling into
poverty. Relative to the overall population, children were also adversely affected
by the crisis.
Focussing on the workers affected by the shock, the share of those in poverty
before the shock was hugely differentiated across countries, from Belgium charac-
terized by a very low level of in-­work poverty with less than 5 percent of workers
in poverty to Spain with a poverty rate of more than 16 percent. The impact of the
crisis was disruptive in Italy where the poverty rate, already as high as 14 percent,
increased to 31 percent showing the incapacity of the Italian welfare system to
offer a good level of absolute resilience. In Belgium and the UK the poverty risk

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Review of Income and Wealth, Series 68, Number 2, June 2022

doubled, from 5 percent to 10 percent and from 9 percent to 18 percent, respec-

tively. In Spain the poverty rate increased by a third, from 17 percent to 22 percent.
Individuals living in one-­earner families were, as expected, more exposed to
poverty risk relative to all individuals affected by the shock: almost half of them
were in poverty in Italy after the shock while in Spain and the UK poverty rates
were as high as 37 percent and 40 percent, respectively. In Belgium, where only 11
percent of working individuals in one-­earner families were poor already before
the COVID-­19 pandemic, 27 percent were below the poverty threshold after the
shutdown.
When extending the analysis to the overall population, the substantial impact
of the pandemic on the poverty rate is evident in Italy with a poverty increase of
more than 3 percentage points, followed by the UK (2 ppt), Belgium and Spain
(1 ppt). The lack of absolute resilience in Italy can be also seen by looking at chil-
dren who faced a poverty rate after the shutdown as high as 33 percent.
Estimates based on real time data as those reported by Menta (2021) confirm
the increase in poverty rates at the beginning of the crisis up to May 2020, in par-
ticular with young individuals, women and individuals affected by the shock being
the most affected.

6. Conclusions
We analyze the extent to which the tax-­benefit systems and earnings compen-
sation schemes in four large European countries, severely hit by the COVID-­19
crisis, provided income support to those affected by the economic shutdown at
the beginning of the pandemic (i.e. April 2020). We assess the level of relative and
absolute welfare resilience of household incomes during the crisis in Belgium, Italy,
Spain and the UK, by simulating counterfactual scenarios with EUROMOD, the
European tax-­benefit microsimulation model, combined with COVID-­19-­related
household surveys and timely labor market data.
We estimate that on average household equivalized original income dropped
substantially by 16 percent–­18 percent in Spain and Belgium and as much as
24 percent–­26 percent in the UK and Italy. The governments’ fiscal response to
COVID-­19 lessened these shocks, leading to smaller average losses in household
disposable income of around 4 percent in Belgium and Spain, 6 percent in Italy
and 8 percent in the UK. While the overall level of income inequality remained
broadly the same, in terms of absolute resilience, the welfare states did not appear
sufficiently well equipped to avoid large increases in income poverty.
The differences in the impact of policies across countries arise from four
main sources: (1) the asymmetric dimension of the shock by country, (2) the dif-
ferent protection offered by each tax-­benefit system, (3) the diverse design of dis-
cretionary measures and (4) the differences in the household level circumstances
and living arrangements of individuals at risk of income loss in each country. In
particular, earnings compensation schemes provided much needed income protec-
tion for households and were the key source of relative resilience in all four coun-
tries. Means-­tested benefits in Belgium and the UK and unemployment benefits in

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Review of Income and Wealth, Series 68, Number 2, June 2022

Spain also played an important role in protecting incomes, especially at the bottom
of the distribution.
Furthermore, our analysis demonstrates on the one hand the cushioning role
played by the tax-­benefit system and on the other hand the importance of the
income of other household members in providing economic resilience to those
affected by the shutdown. The sharing of risks within the household can be seen as
an important complement to the insurance function of the welfare state. However,
as it is usual in distributive analysis, we have assumed complete income pooling
within the household. The possibility that incomes are not in fact pooled serves
to remind us of the non-­equivalence of income received in the form of earnings
compensation schemes as an individual entitlement on the one hand, and income
support schemes, usually assessed on the economic situation of the family as a
whole, on the other.
Although we abstract from macroeconomic adjustments and potential behav-
ioral reactions of households to policies, this paper provides a useful method-
ological benchmark and reference point by which one can evaluate the economic
unfolding of the ongoing situation and the new policies that followed those imple-
mented at the onset of the crisis. As mentioned by Clark et al. (2020) it is important
to understand the mechanisms behind the movement of inequality across coun-
tries to disentangle the contributions of earnings shocks and policy responses.
Furthermore, the analysis could be extended to nowcast the long-­term (annual)
income distribution (Navicke et al., 2014) and to consider the impact on material
deprivation indicators (Figari, 2012). This kind of analysis would deserve much
attention, but it is out of scope of this paper as it requires data not yet available in
a cross-­country perspective.
Moreover, our analysis entails the potential economic effects of the first
month of the COVID-­19 pandemic and examines the extent of the intended effects
of the schemes, though in reality the transfer payments (i.e. earnings compensa-
tion and social assistance schemes) were inevitably delayed and this lag might have
constrained the liquidity of families with effects on consumption and material
deprivation. Consequently, the overall effects of the crisis would be exacerbated if
governments do not provide immediately an income stabilization for those expe-
riencing earnings loss, which can potentially translate into further detrimental
effects on aggregated demand.
It is clear that the effects of the COVID-­19 pandemic are asymmetric and
particularly relevant from an economic perspective for some families and less for
others, despite the compensation measures implemented by the governments. It
is crucial to take into account such unequal distribution of the shock as the eco-
nomic consequences are expected to last long and to assess whether the welfare
systems are ready for the challenges they have to face (Sacchi, 2018).
Several important policy issues can be highlighted. First, in Italy and Spain,
for example, the most important income support schemes depend on past year’s
incomes and do not react to a sudden loss of earnings such as those experienced in
April 2020. Second, some of the welfare tools deployed during the onset of the cri-
sis do not seem to be well-­thought in terms of design as they provide either lump-­
sum transfers or minimum amounts to all those entitled while ignoring previous
contribution bases or declared incomes, creating horizontal equity issues. Third,

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Review of Income and Wealth, Series 68, Number 2, June 2022

the earnings compensation schemes are capped at a different maximum level across
countries which does not resemble differences in earnings distribution or price lev-
els. Last, but not least, some schemes are designed in a way that offers categorical
support and prevents full coverage, with domestic workers and several categories
of temporary workers being excluded from social protection.
These issues confirm that high levels of efficiency and effectiveness of social
protection is key for the sustainability of European welfare systems to allow coun-
tries to have effective automatic stabilizers to support incomes during crisis and
enable governments to focus on the actions needed for the medium-­and long-­term
economic recovery.
In a cross-­country perspective, the empirical evidence on how well-­suited
existing institutional arrangements are for compensating income loss during the
pandemic raises normative issues on the protection level that the tax-­benefit sys-
tems should guarantee to the population and backs up several longstanding ideas
debated in the recent past, such as a Basic Income and a European unemployment
benefit. Unconditional Basic Income could make comprehensive compensation
possible during the pandemic, without the need of discretionary and temporary
policies (Atkinson, 2015). A European unemployment benefit scheme could pro-
vide a macroeconomic stabilization and fiscal risk sharing mechanism with inter-
regional smoothing potential as important as intertemporal smoothing potential
through debt (Dolls et al., 2018). Both ideas, although likely to be developed as
academic reflections rather than policy suggestions, can contribute to understand
how to cushion asymmetric shocks and provide income insurance to the most vul-
nerable households in a systematic way, highlighting the potential social dimension
of the European institutions already reinforced by the common European response
to the COVID-­19 crisis.

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