stabilizers by income group. The observed decomposition patterns are largely the same pattern as for the overall population with two exceptions. Lower income groups in Croatia and Poland show a more pronounced role of automatic stabilizers. While this is due to a higher contribution of SIC in Croatia, it is due to a higher contribution of taxes in Poland.

A general observation is the reduced role of other COVID-19-related policy changes in the bottom quintiles which seem to play an even more minor role for severely affected than the overall population. The only exception is Ireland, where other COVID-19-related policies significantly cushion decreases in market incomes. As shown by Figure A7, in selected countries social assistance benefits, among automatic stabilizers, had an important role in cushioning the negative income shock of the crisis on the poorest quintile for the most severely affected: this occurred to a larger extent in the Netherlands, Finland and Greece, but also in Italy, France, Austria, and Cyprus. This result can be explained by the fact that, in recent years, some of these countries (especially the Netherlands, Greece, Italy, and, to some extent France) have significantly improved generosity and coverage of their means-tested social assistance programs, especially of Guaranteed Minimum Income (GMI) schemes.

# **5 Conclusion**

This paper seeks to analyze the effectiveness of tax-benefit systems in mitigating the effect of the COVID-19 pandemic on household income in the EU. In the absence of actual data containing information on household income during the pandemic, we use the tax-benefit microsimulation model EUROMOD to nowcast the distribution of household disposable income during the first year of the pandemic in each EU country, based on information on labor market transition shares observed in the EU-LFS and administrative data. EUROMOD is further used to decompose the changes in the income distribution and to quantify the effects of: (i) earnings losses due to COVID19, (ii) automatic stabilizers, (iii) monetary compensation schemes introduced during the pandemic; and (iv) COVID-19-specific reforms to taxes and benefits implemented by EU governments.

Our analysis provides a number of interesting findings. First, we show that there is a great deal of heterogeneity between countries in terms of earnings losses and the effect of tax–benefit policies during the COVID-19 pandemic. According to our nowcasting exercise, gross market incomes dropped between 1.8% in the Netherlands and around 15% in Malta during the first year of the pandemic. The cushioning role of tax-benefit systems is important as changes in mean disposable income are significantly smaller than those in market income in all countries. Second, in most countries, the largest contribution to cushioning the economic shock of the pandemic comes from monetary compensation schemes. In particular, our results show that the ‘compensation’ part accounts for the largest cushioning effect of monetary compensation schemes in most countries. Third, automatic stabilizers also play an important role in cushioning household incomes, contributing up to 6% to the change in mean disposable income in Ireland. In most countries, the cushioning effect of automatic stabilizers increases with income, depicting the role of taxes and social insurance contributions in providing income stabilization. In terms of benefits, unemployment insurance contributes the most to automatic stabilization, whereas the role of social assistance benefits is limited in most countries. Fourth, COVID-19-specific changes to taxes and benefits play only a minor role in most countries, except in Ireland, where they account for a 4% increase in household income. Finally, a similar pattern is observed for those severely affected by 18