Abstract
The COVID-19 crisis has led to substantial reductions in earnings. We propose a new measure of financial vulnerability, computable through survey data, to determine whether households can withstand a certain income shock for a defined period of time. Using data from the ECB Household Finance and Consumption Survey (HFCS) we analyse pre-existing financial vulnerability in seven EU countries. We find that income support is essential for many families: 47.2 million individuals, out of the 243 million considered, cannot afford three months of food and housing expenses without privately earned income. Differences across countries are stark, and those born outside of the EU are especially vulnerable. Through a tax-benefit microsimulation exercise, we then derive household net income when employees are laid-off and awarded the COVID-19 employment protection benefits enacted in the different countries. Our findings suggest that the COVID-19 employment protection schemes awarded are extremely effective in reducing the number of vulnerable individuals. The relative importance of rent and mortgage suspensions in alleviating vulnerability is highly country dependent.
Highlights
The COVID-19 outbreak has brought on, alongside a major health crisis, dramatic economic shocks to European countries
This paper analyses households’ pre-existing vulnerabilities to an income shock and assesses the degree of protection awarded to employees, in different European countries, by COVID-19 employment protection schemes
We decide to look at the effect of these benefits in safeguarding employees against vulnerability, because this support, which is essentially a more generous form of the usual unemployment benefits, is the largest COVID-19 support policy in all countries
Summary
The COVID-19 outbreak has brought on, alongside a major health crisis, dramatic economic shocks to European countries. Subjective measures instead are based on perception and self-reported, usually through surveys An example of the latter is Lusardi et al (2011) who examine US household financial vulnerability by asking how confident individuals are that they could come up with $2000 in 30 days to face an unexpected need. By expanding the basket to include rent and mortgages on the main residence, the numbers are respectively 10.5%, and 2.1% once the COVID-19 unemployment benefits are awarded This vulnerability characterization is useful for economic research and public policy, being simple and readily available from survey data covering consumption and savings. It can help identify groups of individuals more vulnerable to income shocks, distinguishing, for instance, between employees and the self-employed.
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