IAB and ifo: Welfare State Eases the Blow of Income Lost to Coronavirus in Germany

Germany’s state welfare system was able to significantly mitigate employees’ loss of income due to the coronavirus crisis. This is the conclusion of a joint study by the Institute for Employment Research (IAB) and the ifo Institute. The study estimates that the pandemic cut gross income by about 3 percent; among the bottom 10 percent of incomes, this reduction was as high as 4.3 percent. “However, the combination of the short-time work allowance plus lower taxes and duties reduced this decrease to an average of 1.1 percent,” says Andreas Peichl, who heads the Center for Macroeconomics and Surveys at ifo. “Short-time work is functioning as planned – like a shock absorber in a car.”

Kerstin Bruckmeier, head of an IAB research group, says: "A large part of the crisis-related loss of income is offset by unemployment insurance." If you add in the child bonus, the increase in the tax-free threshold for single parents, the emergency supplementary child benefit, and easier access for job seekers to the services of basic social security, and if you also take households with no one working into account, then disposable income across all income brackets declined by just 0.1 percent on average. And in fact, the net income of the bottom 20 percent actually increased slightly. In the upper income brackets, the trend remains negative, so income inequality is not becoming worse.

The results incorporate developments through September 2020; in other words, prior to the sharp rise in infections that started in October. Nevertheless, distribution outcomes are not expected to change materially, due in part to the aid provided in November and December. “How the crisis will affect income distribution in the coming years depends critically on how pandemic-related unemployment and financial support for the public develop further,” the researchers write in the study.

Questions can be directed to

Prof. Andreas Peichl, 0049 89 9224 1225, Peichl@ifo.de and Dr. Kerstin Bruckmeier, 0049 911 179 4432, Kerstin.Bruckmeier@iab.de