The Impact of the COVID-19 Shock on Labour Income Inequality: Evidence from Italy

Abstract

The spread of the pandemic and the consequent adoption of lockdown measures to prevent infections had severe consequences for business activity and employment. By using data from the Italian Labour Force Survey, this paper simulates the effect of the COVID-19 crisis on the dynamics and distribution of equivalized labour income in the first two quarters of 2020. Moreover, it assesses the effectiveness in smoothing labour income losses of the social insurance benefits that were in place before the crisis and of the temporary measures adopted by the Italian Government to face it. We find that the economic repercussions of the COVID-19 shock impacted low-income households more heavily than higher income families, implying a substantial increase in labour income inequality. However, our results show that the social insurance benefits temporarily introduced by the Italian Government were able, at least in the short term, to compensate for these income losses and for the increased inequality significantly more than the pre-crisis measures.

Keywords: labour market, inequality, social insurance benefits, recessions, coronavirus, Covid-19

JEL Classification: H20, J20, D31