The COVID-19 Resilience of a Continental Welfare Regime - Nowcasting the Distributional Impact of the Crisis

Denisa Sologon; Cathal O’Donoghue; Iryna Kyzyma; Jinjing Li; Jules Linden; Raymond Wagener

doi:10.1007/s10888-021-09524-4

The COVID-19 Resilience of a Continental Welfare Regime - Nowcasting the Distributional Impact of the Crisis

Denisa Sologon, Cathal O’Donoghue, Iryna Kyzyma, Jinjing Li, Jules Linden, Raymond Wagener

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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 over the whole of 2020. Our approach relies on a dynamic microsimulation modelling 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 which reflect the macroeconomic climate during the crisis. We focus on Luxembourg, a country that introduced minor tweaks to the existing tax-benefit system, which has a strong social insurance focus that gave certainty during the crisis. We find the system was well-equipped ahead of the crisis to cushion household incomes against job losses. The income-support policy changes were effective in cushioning household incomes and mitigating an increase in income inequality, allowing average household disposable income and inequality levels to bounce back to pre-crisis levels in the last quarter of 2020. 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 matched by an increase in redistribution, driven by an increase in the generosity of benefits and larger access to benefits. The nowcasting model is a "near" real-time analysis and decision support tool to monitor the recovery, scalable to other countries with high applicability for policymakers.

Supplementary Information: The online version contains supplementary material available at doi:10.1007/s10888-021-09524-4.

Original language	English
Pages (from-to)	777-809
Number of pages	33
Journal	Journal of Economic Inequality
Volume	20
Issue number	4
DOIs	https://doi.org/10.1007/s10888-021-09524-4
Publication status	Published - 22 Feb 2022

Bibliographical note

Funding Information:
This research is part of the project Modelling the macroeconomic and distributional effects of COVID-19 and restarting scenarios supported by the National Research Fund, Luxembourg (grant COVID-19/2020-2/14854549/MODVid ). We would like to acknowledge the data support of Johann Neumayr, Marco Schockmel, Mehran Kafaï, Paul Reiff, Véronique Sinner and Jérôme Hury at Statec, and Joel Machado and Kristell Leduc at LISER. The results use EUROMOD version I2.0+, which is maintained, developed and managed by the Joint Research Centre (JRC) of the European Commission, in collaboration with EUROSTAT and national teams from the EU countries. The results and their interpretation are our responsibility. We are grateful for comments from Frédéric Docquier, Karina Doorley, from participants of the Research Colloquium at Trier University, the IMA Conference on ”Microsimulation modelling of policy responses to COVID-19”, the joint LISER-NUIG-IMA Microsimulation and Inequality Seminar and the ISER Online Expert meeting on nowcasting and mid-term projections through microsimulation models. The data that support the findings of this study are available from EUROSTAT, but restrictions apply to the availability of these data, which were used under license for the current study, and so are not publicly available. Data are however available from the authors upon reasonable request and with permission of EUROSTAT.

Publisher Copyright:
© 2022, The Author(s).

Keywords

COVID-19
Nowcsting
Microsimulation
Income inequality
tax-benefit policy
Tax-benefit policy
Nowcasting

Access to Document

10.1007/s10888-021-09524-4Licence: CC BY

https://link.springer.com/article/10.1007/s10888-021-09524-4Licence: CC BY

Cite this

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title = "The COVID-19 Resilience of a Continental Welfare Regime - Nowcasting the Distributional Impact of the Crisis",

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 over the whole of 2020. Our approach relies on a dynamic microsimulation modelling 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 which reflect the macroeconomic climate during the crisis. We focus on Luxembourg, a country that introduced minor tweaks to the existing tax-benefit system, which has a strong social insurance focus that gave certainty during the crisis. We find the system was well-equipped ahead of the crisis to cushion household incomes against job losses. The income-support policy changes were effective in cushioning household incomes and mitigating an increase in income inequality, allowing average household disposable income and inequality levels to bounce back to pre-crisis levels in the last quarter of 2020. 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 matched by an increase in redistribution, driven by an increase in the generosity of benefits and larger access to benefits. The nowcasting model is a {"}near{"} real-time analysis and decision support tool to monitor the recovery, scalable to other countries with high applicability for policymakers.Supplementary Information: The online version contains supplementary material available at doi:10.1007/s10888-021-09524-4.",

keywords = "COVID-19, Nowcsting, Microsimulation, Income inequality, tax-benefit policy, Tax-benefit policy, Nowcasting",

author = "Denisa Sologon and Cathal O{\textquoteright}Donoghue and Iryna Kyzyma and Jinjing Li and Jules Linden and Raymond Wagener",

note = "Funding Information: This research is part of the project Modelling the macroeconomic and distributional effects of COVID-19 and restarting scenarios supported by the National Research Fund, Luxembourg (grant COVID-19/2020-2/14854549/MODVid ). We would like to acknowledge the data support of Johann Neumayr, Marco Schockmel, Mehran Kafa{\"i}, Paul Reiff, V{\'e}ronique Sinner and J{\'e}r{\^o}me Hury at Statec, and Joel Machado and Kristell Leduc at LISER. The results use EUROMOD version I2.0+, which is maintained, developed and managed by the Joint Research Centre (JRC) of the European Commission, in collaboration with EUROSTAT and national teams from the EU countries. The results and their interpretation are our responsibility. We are grateful for comments from Fr{\'e}d{\'e}ric Docquier, Karina Doorley, from participants of the Research Colloquium at Trier University, the IMA Conference on ”Microsimulation modelling of policy responses to COVID-19”, the joint LISER-NUIG-IMA Microsimulation and Inequality Seminar and the ISER Online Expert meeting on nowcasting and mid-term projections through microsimulation models. The data that support the findings of this study are available from EUROSTAT, but restrictions apply to the availability of these data, which were used under license for the current study, and so are not publicly available. Data are however available from the authors upon reasonable request and with permission of EUROSTAT. Publisher Copyright: {\textcopyright} 2022, The Author(s).",

year = "2022",

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doi = "10.1007/s10888-021-09524-4",

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AU - O’Donoghue, Cathal

AU - Kyzyma, Iryna

AU - Li, Jinjing

AU - Linden, Jules

AU - Wagener, Raymond

N1 - Funding Information: This research is part of the project Modelling the macroeconomic and distributional effects of COVID-19 and restarting scenarios supported by the National Research Fund, Luxembourg (grant COVID-19/2020-2/14854549/MODVid ). We would like to acknowledge the data support of Johann Neumayr, Marco Schockmel, Mehran Kafaï, Paul Reiff, Véronique Sinner and Jérôme Hury at Statec, and Joel Machado and Kristell Leduc at LISER. The results use EUROMOD version I2.0+, which is maintained, developed and managed by the Joint Research Centre (JRC) of the European Commission, in collaboration with EUROSTAT and national teams from the EU countries. The results and their interpretation are our responsibility. We are grateful for comments from Frédéric Docquier, Karina Doorley, from participants of the Research Colloquium at Trier University, the IMA Conference on ”Microsimulation modelling of policy responses to COVID-19”, the joint LISER-NUIG-IMA Microsimulation and Inequality Seminar and the ISER Online Expert meeting on nowcasting and mid-term projections through microsimulation models. The data that support the findings of this study are available from EUROSTAT, but restrictions apply to the availability of these data, which were used under license for the current study, and so are not publicly available. Data are however available from the authors upon reasonable request and with permission of EUROSTAT. Publisher Copyright: © 2022, The Author(s).

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N2 - 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 over the whole of 2020. Our approach relies on a dynamic microsimulation modelling 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 which reflect the macroeconomic climate during the crisis. We focus on Luxembourg, a country that introduced minor tweaks to the existing tax-benefit system, which has a strong social insurance focus that gave certainty during the crisis. We find the system was well-equipped ahead of the crisis to cushion household incomes against job losses. The income-support policy changes were effective in cushioning household incomes and mitigating an increase in income inequality, allowing average household disposable income and inequality levels to bounce back to pre-crisis levels in the last quarter of 2020. 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 matched by an increase in redistribution, driven by an increase in the generosity of benefits and larger access to benefits. The nowcasting model is a "near" real-time analysis and decision support tool to monitor the recovery, scalable to other countries with high applicability for policymakers.Supplementary Information: The online version contains supplementary material available at doi:10.1007/s10888-021-09524-4.

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KW - Nowcsting

KW - Microsimulation

KW - Income inequality

KW - tax-benefit policy

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The COVID-19 Resilience of a Continental Welfare Regime - Nowcasting the Distributional Impact of the Crisis

Abstract

Bibliographical note

Keywords

Access to Document

Other files and links

MODVid: Modeling the macroeconomic and distributional effects of COVID-19 and restarting scenarios