Abstract
We evaluate the COVID-19 resilience of a Continental welfare regime by nowcasting the implications of the shock and its associated policy responses on the distribution of household incomes. Our approach relies on a dynamic microsimulation approach that combines a household income generation model estimated on the latest EU-SILC wave with novel nowcasting techniques to calibrate the simulations using external macro controls reflecting the macroeconomic climate during the crisis. We focus on Luxembourg, a country that introduced minor tweaks to the existing tax-benefit system which already contained instruments with a strong social insurance focus that gave certainty during the crisis. The income-support policy changes were effective in cushioning household incomes and mitigating an increase in income inequality in the early stages of the pandemic. The share of labour incomes dropped, but was compensated by an increase in benefits, reflecting the cushioning effect of the transfer system.Overall market incomes dropped and became more unequal. Their disequalizing evolution was, however, overpowered by an increase in tax-benefit redistribution. Net redistribution increased, driven by an increase in the generosity of benefits and larger access to benefits.These changes are mainly explained by the labour market shock, signalling the automatic stabilizers embedded in the pre-COVID system. The system was well-equipped ahead of the crisis to cushion household incomes against job losses. The methodology is scalable to other countries and well-designed to explore the impact of later stages in the COVID crisis, both economy-wide and sector-specific. The model is a real-time analysis and decision support tool to monitor the recovery, with high applicability for policymakers.
Highlights
The novel coronavirus, which was first identified in China in December 2019 and spread to Europe in February 2020, forced governments of many countries to undertake unprecedented measures directed at containing the pandemic
Where does Luxembourg stand among other countries in terms of its policy responses to the COVID-19 crisis and their ability to mitigate changes in individual welfare induced by the economic shock? Studies focusing on the impact of the Covid-19 pandemic on the distribution of household incomes are relatively scarce and cover only a limited number of countries
The rapid economic changes and the lack of up-to-date data to understand these changes increased the relevance of using microsimulation tools to understand these changes and how the COVID-induced policy responses fared in cushioning household incomes
Summary
The novel coronavirus, which was first identified in China in December 2019 and spread to Europe in February 2020, forced governments of many countries to undertake unprecedented measures directed at containing the pandemic. The first infected person in the country was registered on February 29.5 On March 16, with 81 officially confirmed cases, the government introduced a full lockdown closing all educational facilities, non-essential shops and businesses, cancelling public events and restricting public gatherings.6 Due to those measures, Luxembourg managed to avoid a severe outbreak of COVID-19 in spring and early summer with the situation somewhat worsening from the second half of July onwards. Luxembourg, in contrast, belongs to the Continental welfare regime, which relies on insurance-based income support programs aiming to secure individuals from income losses in the case of exogenous shocks (e.g. unemployment) or life events (e.g. retirement) The role of such programs is crucial in times of crises, when many individuals lose their jobs or are forced to reduce their working hours. The infrastructure is scalable to other countries as it relies on a flexible income generation model, on comparative cross-national survey data and macro alignment statistics, and the pan-European tax-benefit model, EUROMOD, enhancing its applicability and policy relevance
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