Estimating the Impact of Covid-19 and Policy Responses on Australian Income Distribution Using Incomplete Data

Abstract

This paper undertakes a near real-time analysis of the income distribution effects of the Covid-19 crisis in Australia to understand the ongoing changes in the income distribution as well as the impact of policy responses. By semi-parametrically combining incomplete observed data from three different sources–the monthly Longitudinal Labour Force Survey, the Survey of Income and Housing and administrative payroll data–we estimate the impact of Covid-19 on the Australian income distribution and decompose its impact into the income shock effect and the policy effect between February and June 2020, covering the immediate periods before and after the initial Covid-19 outbreak. Our results suggest that, despite growth in unemployment, the Gini coefficient of equivalised household disposable income dropped by more than 0.02 points between February and June 2020. This reduction is due to the additional wage subsidies and welfare supports offered as part of the policy response, offsetting the increase in income inequality from the income shock effect. The results shows the effectiveness of temporary policy measures both in maintaining living standards and avoiding increases in income inequality. However, the heavy reliance on the support measures shown in the modelling raises the possibility that the changes in the income distribution may be reversed, or even that inequality and living standards could substantially worsen once the measures are withdrawn.