Earnings shocks and stabilization during COVID-19

Abstract

This paper documents the magnitude and distribution of U.S. earnings changes during the COVID-19 pandemic and how fiscal relief offset lost earnings. We build panels from administrative tax data to measure annual earnings changes. The frequency of earnings declines during the pandemic were similar to the Great Recession, but the distribution was different. In 2020, workers starting in the bottom half of the distribution were more likely to experience an earnings decline of at least 10 percent. While most workers experiencing large annual earnings declines do not receive unemployment insurance, over half of beneficiaries were made whole in 2020, as unemployment insurance replaced a median of 105 percent of their annual earnings declines. After incorporating unemployment insurance, the likelihood of large earnings declines among low-earning workers was not only smaller than during the Great Recession, but also smaller than in 2019.

Keywords: COVID-19; Countercyclical policy; Stimulus checks; Unemployment insurance; Wage earnings.

Fig. 1

Share of workers with real earnings changes (by year). Source: Authors' calculations using IRS data from Form W-2. Note: Among workers ages 25 and older with earnings or unemployment income in year t–1. The 2020 point estimates reflect the midpoints of the expected ranges based on the data as of September 2021.

Fig. 2

Share of workers with at least a 10 percent real annual earnings decrease or increase (by prior-year earnings + UI). Source: Authors' calculations using IRS data from Form W-2 and 1099-G. Note: Among workers ages 25 and older in year t with earnings or unemployment benefits in year t–1. Shaded region reflects the expected range based on data as of early September and the 2020 line is the midpoint of the expected range as of early September 2021.

Fig. 3

Unemployment Insurance Recipiency and Replacement Rates (by prior-year earnings + UI). Source: Authors' calculations using IRS data from Forms W-2 and 1099-G. Note: Among workers ages 25 and older with earnings or unemployment income in year t–1 who had at least a 10 percent earnings decline. Due to small sample sizes in some years, results are presented for 5 centile groups, except the top quintile which is aggregated into a single quintile. Results for the median replacement rate are suppressed for the bottom 5 percent due to the low baseline earnings resulting in particularly large median replacement rates.

Fig. 4

Share of workers with at least a 10 percent real decline in annual earnings plus public support programs (by prior-year earnings + UI). Source: Authors' calculations using IRS data from Forms W-2 and 1099-G. Note: Among workers ages 25 and older in year t with earnings or unemployment income in year t–1. Shaded region reflects the expected range based on data as of early September and the 2020 line is the midpoint of the expected range as of early September 2021.