How Did the Distribution of Income Growth Change Alongside the Hot Pre-Pandemic Labor Market and Recent Fiscal Stimulus?

Abstract

We document heterogeneity in the evolution of income growth since the Great Recession. Using administrative data on the incomes of over 7 million households, we estimate the extent to which lower-income households began to catch-up with higher earners in two distinct phases: first, as the labor market tightened prior to the COVID-19 recession; and second, as policies put in place during the pandemic supported incomes at the lower end of the distribution. The Federal Reserve—which has increasingly expressed interest in inequality—may be able to help narrow income disparities by supporting a “high pressure” economy with low unemployment and interest rates. Despite COVID-19’s unprecedented negative economic impact to low-wage workers, the federal government’s swift and targeted fiscal supports lead to increased income for lower-income households since the onset of the pandemic. The role government supports played in mitigating income losses and maintaining the income growth momentum is clear. When including government transfers, the share of households experiencing -10 percent or worse income outcomes actually fell modestly for the first income quartile, instead of rising by 25 percent in a counterfactual without supports from Economic Impact Payments and Unemployment Insurance.