Economics in a picture
In the short run, the impact of the COVID-19 pandemic on labour income is the highest at both ends of the disposable income distribution
The contraction in economic activity resulting from the Covid-19 pandemic has a very substantial negative impact on individuals' labour income and, as such, on households’ disposable income. Nevertheless, these effects tend to be very heterogeneous across households.
For each household, the impact on disposable income depends on the number of individuals with labour income, as well as their labour status and the sectors in which they work. An analysis based on data from the 2017 Portuguese Household Finance and Consumption Survey suggests that, in the short term, the negative impact of the pandemic increases with the level of household disposable income. The lowest impact on low-income households (before the pandemic) stems from the fact that there are many households in this group whose income comes from pensions or other public transfers, which have not been affected in the current context.
In terms of labour income, the short-term impact of the pandemic is more moderate in households in the middle of the disposable income distribution. In households with low disposable income, the greater reduction in labour income is due to a higher concentration of workers in sectors most affected by the pandemic and in labour status categories that do not benefit from income support measures. These situations are also more prevalent in younger age groups. In households with high disposable income, the reduction in labour income is amplified by the existence of upper limits applicable to income earned under the support measures.
This analysis on the impact of the pandemic on the households’ financial situation has a short term horizon and should not be extrapolated to longer horizons, either in terms of magnitudes or in terms of the distributional effects.
For further details see the Special Issue “The economic impact of the pandemic crisis”, published in the Economic Bulletin of the Banco de Portugal, of May 2020.
Prepared by Sónia Costa, Luísa Farinha, Luís Martins and Renata Mesquita. The analyses, opinions and findings expressed above represent the views of the author and not necessarily those of the Banco de Portugal or the Eurosystem.
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