Earnings Business Cycles: The Covid Recession, Recovery, and Policy Response — Federal Reserve Board

Summary

Federal Reserve Board Finance and Economics Discussion Series paper 2023-004, dated December 2022, by Jeff Larrimore, Jacob Mortenson and David Splinter, titled Earnings Business Cycles: The Covid Recession, Recovery, and Policy Response. The abstract says that, compared to prior recessions, the Covid policy response and recovery were far more progressive. Among workers starting in the bottom quintile, it reports median real earnings including fiscal relief increased 66 percent in 2020, while after the prior two recessions this measure had decreased by 24 percent, and that top-quintile earnings were approximately unchanged. It attributes the difference largely to larger Covid-era stimulus payments and unemployment insurance. The paper states its conclusions are the authors' own and do not indicate concurrence by the Board of Governors.

Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used

Issuer: Source documents
Document type: Earnings Business Cycles The Covid Recession Recovery And Policy Response
Case: Earnings Business Cycles The Covid Recession Recovery And Policy Response

Cite this document

“Earnings Business Cycles: The Covid Recession, Recovery, and Policy Response — Federal Reserve Board.” Original at www.federalreserve.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/earnings-business-cycles-the-covid-recession-recovery-and-policy-response/, SHA-256 747f85bd22c6b1167c67e2901acea779f7cb7a877561d9dabaff447988e4deff.

Full text

Finance and Economics Discussion Series

Federal Reserve Board, Washington, D.C.
ISSN 1936-2854 (Print)
ISSN 2767-3898 (Online)

Earnings Business Cycles: The Covid Recession, Recovery, and
Policy Response

Jeff Larrimore, Jacob Mortenson, and David Splinter

2023-004

Please cite this paper as:
Larrimore, Jeff, Jacob Mortenson, and David Splinter (2023). “Earnings Business Cycles:
The Covid Recession, Recovery, and Policy Response,” Finance and Economics Discus-
sion Series 2023-004. Washington: Board of Governors of the Federal Reserve System,
https://doi.org/10.17016/FEDS.2023.004.

NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary
materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth
are those of the authors and do not indicate concurrence by other members of the research staff or the
Board of Governors. References in publications to the Finance and Economics Discussion Series (other than
acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers.
Earnings Business Cycles:
The Covid Recession, Recovery, and Policy Response
Jeff Larrimore a
Federal Reserve Board

Jacob Mortenson b
Joint Committee on Taxation

David Splinter c
Joint Committee on Taxation

December 2022

Abstract
Using a panel of tax data, we follow the earnings of individuals over business cycles.
Compared to prior recessions, the Covid policy response and recovery were far more
progressive. Among workers starting in the bottom quintile, median real earnings
including fiscal relief increased 66 percent in 2020 and earnings increases offset relief
decreases in the 2021 recovery. After the prior two recessions, this measure had
decreased by 24 percent. Among those starting in the top quintile, median and average
real earnings were approximately unchanged. This difference from prior recessions is
largely attributable to larger Covid-era stimulus payments and unemployment
insurance.
Keywords: Covid-19, wages, earnings, stimulus checks, unemployment insurance,
countercyclical policy, government transfers
JEL: D31, E24, H53, J30, J65

________________________________________________________________________
The online appendix and data are available at david.splinter.com. For helpful comments, we thank
Tom Barthold, Yonatan Berman, William Boning, Jim Cilke, Connor Dowd, Michael Love, Bert Lue,
Robert Moffitt, Rachel Moore, Ryan Nunn, John Sabelhaus, Daniel Waldenström, James Ziliak, and
Eric Zwick. We thank Eric Heiser for assistance with the late-data imputation procedure. Larrimore:
The results and opinions expressed in this paper reflect the views of the authors and should not be
attributed to the Federal Reserve Board. Mortenson and Splinter: This paper embodies work
undertaken for the staff of the Joint Committee on Taxation to improve individual income tax
modeling, but as members of both parties and both houses of Congress comprise the Joint Committee
on Taxation, this work should not be construed to represent the position of any member of the Committee.
a
Corresponding Author. 20th St. and Constitution Ave. N.W., Washington, DC 20551. Jeff.Larrimore@frb.gov
b
502 Ford House Office Building, Washington, DC 20515. Jake.Mortenson@jct.gov
c 502 Ford House Office Building, Washington, DC 20515. David.Splinter@jct.gov

1
1. Introduction
The Covid recession was historically short, lasting just two months. Nevertheless, the
severity of economic disruptions caused many low-earning workers’ annual earnings to decline
substantially in 2020. While employment rebounded in 2021, fiscal relief declined and inflation
increased, offsetting some economic gains. Using a panel of administrative data including all wage
earners, we measure the evolution of individual-level earnings over recent recessions and through
the first year and a half of the Covid recovery, both with and without fiscal relief. Compared to
prior recessions, the Covid recession was more regressive, but the Covid recovery and policy
response were far more progressive.
The data we use offer several advantages relative to other sources. First, we follow the
same individuals over time, contrasting with widely available cross-sectional estimates, which
compare different individuals over time. 1 Second, our estimates use extremely large samples—5
percent of workers—that exceed those of available survey data. Third, using independent reporting
by employers and governments, we precisely measure earnings and direct fiscal relief (i.e.,
unemployment insurance benefits, stimulus payments, tax holidays, and various tax credits).
Using these data, we find that after declining markedly in 2020, earnings among low-
earning workers increased in 2021 (after accounting for inflation). Despite these improvements,
real earnings among those who were in the bottom quintile before the recession typically remained
below their 2019 levels. In contrast, among top-quintile workers, real earnings increased in 2020,
but declined in 2021 as inflation accelerated, leaving their median earnings slightly below 2019
levels.
Incorporating the substantial and progressive fiscal relief during this period paints a
different picture. For bottom-quintile workers, market earnings gains in 2021 mostly offset the
partial withdrawal of fiscal relief. Consequently, earnings after fiscal relief for the bottom quintile
remained high in 2021—on average, more than double pre-recession earnings. We perform a
similar analysis on the 2001 and 2008 recessions and find substantially different patterns.
We consider four measures of the distribution of real earnings changes from the year before
to the years after a recession: the share of workers whose earnings increased, the median earnings
change by quintile, the share of workers with large changes in earnings, and the distribution-wide
progressivity of earnings changes. Results are consistent across these measures: the initial
distributional impacts of market earnings changes in the Covid recession were more regressive
than in prior recessions, whereas both the Covid recovery and policy response have been far more
progressive.

1
See Semega and Kollar (2022) and Blanchet, Saez, and Zucman (2022) for cross-sectional income trends. Relative
to these cross-sectional discussions, panel data control for significant re-ranking due to earnings mobility and are
valuable for following the trajectory of the same individuals. See online appendix Figure A5 for a comparison of panel
and cross-sectional results.

2
2. Relation to Existing Research on Earnings During the Pandemic
This paper expands upon the research examining earnings trends in the pandemic. Research
based on micro-level survey data (Moffitt and Ziliak 2020; Montenovo et al. 2020; Cortes and
Forsythe 2022), macro-level administrative data (Berman 2020; Blanchet, Saez, and Zucman
2022), and data from state governments and private companies (Bartik et al. 2020; Cajner et al.
2020; Chetty et al. 2022) consistently show disproportionate initial losses among low-wage
occupations in 2020. See Cortes and Forsythe (2022) for a review of the extensive literature on the
2020 downturn. Additionally, Cortes and Forsythe (2021) and Larrimore, Mortenson, and Splinter
(2022a) found that low-earning workers received the bulk of the direct fiscal relief to households
and families, offsetting increases in market earnings inequality. This existing research, however,
has primarily focused on 2020 rather than medium-term trends into 2021.
The tax data used here track individuals over long time-periods and measure individual
earnings changes before, during, and after the pandemic shock. These data allow all wage earners
(whether they file a tax return or not) to be followed for multiple years, providing precise micro-
level earnings changes. In contrast, the Current Population Survey (CPS) can only track individuals
for one year, and even then, only for individuals who do not change residence. Major panel
surveys, such as the Panel Survey of Income Dynamics, can track people over time but have
delayed reporting, smaller samples, and must contend with sample attrition (Fitzgerald,
Gottschalk, and Moffit 1988). Consequently, we are unaware of other research showing how the
same workers from before the pandemic fared two-years later in 2021.
In addition to their ability to accurately track individual earnings over time, tax data also
capture unemployment benefits and tax credits that are underreported in survey data (Larrimore,
Mortenson, and Splinter forthcoming; Meyer et al. 2020). While underreporting of fiscal relief is a
regular concern, survey errors were larger than usual during the Covid pandemic (Rothbaum and
Bee 2021). Hence, this research using administrative data can also fill gaps in our understanding of
recent trends that resulted from the challenges that the pandemic caused for economic surveys.
Although we are unaware of other work documenting the extent to which individual
workers saw earnings gains in 2021, our findings are consistent with Greig, Deadman, and
Sonthalia’s (2022) findings on checking account balances. They observed that at the end of 2021,
balances were well above their 2019 levels, and these increases were most pronounced among
low-income families with bank accounts. Similarly, Meyer, Murphy, and Sullivan (2022) observed
that lower-income groups did not substantially reduce consumption since the pandemic began,
suggesting that fiscal relief’s income stabilization flowed through to consumption.
Our estimates on market earnings patterns in prior recessions are also consistent with
earlier findings using administrative earnings data. Guvenen, Ozkan, and Song (2014) estimated
that during recessions, earnings increases among high-earning worker become less frequent and
earnings losses among low-earning workers become more frequent. McKinney, Abowd, and
Janicki (forthcoming) also observed procyclical skewness of annual earnings changes. Our

3
findings on the effects of tax and transfer policies are also consistent with findings from other
countries (Busch et al. 2022).
3. Administrative Tax Data Panel
This paper builds on the data and methods from Larrimore, Mortenson, and Splinter
(2022a), which used a random 5-percent sample of all individuals appearing in IRS tax data
(Internal Revenue Service and Joint Committee on Taxation 2022). We extend the analysis
forward to 2021 to consider the Covid recovery and back to 1999 to allow for comparisons with
the 2001 recession.
A. Tax Data Sources
Annual wages and salaries (“earnings”) are measured from Form W-2, and unemployment
insurance benefits are measured using Form 1099-G and Form 1040 tax returns (the latter is used if
larger than the former). Estimates from IRS audit studies suggest that these information returns are
extremely comprehensive and only miss an estimated one percent of earnings. To incorporate
measures of stimulus payments and other fiscal relief observed in tax data, we use Form 1040 tax
returns and other population-level data, as discussed below.

B. Panel of Individual-Level Earnings Measures
All estimates are based on multi-year panels of earnings and fiscal relief. These panels
include anyone in the initial year with wages or unemployment benefits, even if they have no income
from either source in subsequent years. We focus on those with this labor market attachment in years
just prior to recessions (2000, 2007, and 2019). While we allow for exits (earnings of zero dollars),
we do not consider changes in entry rates into the labor force during each recession. 2 The sample is
limited to adults aged 24 or older in the initial year, excluding those who are deceased at the end
of the year. The age range avoids large earnings fluctuations among young workers and retains
earnings declines among retirees who were working before the pandemic. 3
All data are at the individual level. Individual-level totals for earnings and unemployment
insurance benefits are obtained by aggregating all W-2 forms and 1099-G forms. 4 Stimulus
payments and other tax credits, as well as the self-employment portion of the payroll tax holiday,
are determined at the tax-unit level and then divided equally between spouses for tax units filing

2 Entry and exit rates are largely similar each year from 1999 through 2021 and therefore do not appear to substantially

affect our results. For example, entry rates range from 4.3 to 5.9 percent with an average of 5.4 percent. For workers
at least 60 years-old, entry rates are lower (3.3 percent in the last two recessions) and exit rates are higher (11 and 12
percent in the last two recessions). See online appendix Figures A2 and A3 and online data Tables B2 and B3.
3
This captures accelerated retirements resulting from the Covid recession. Domash and Summers (2022) estimated
that 1.3 million workers left the workforce due to aging reasons unrelated to the pandemic and another 1.3 million left
due to accelerated retirements. Results for working-age adults (ages 25–59) in 2020 were similar to those for all adults
over age 24 (Larrimore, Mortenson, and Splinter 2022a).
4
We focus on Medicare Wages (Box 5) on Form W-2, which is the broadest wage measure on the form. We retain
the most recent Form W-2 with a non-missing amount for each individual from each employer in each year. These
forms do not include self-employment income. Expanded unemployment insurance included Pandemic Unemployment
Assistance payments to independent contractors, although our sample definition means these recipients are only
included if they had earnings or unemployment benefits in the initial year.

4
joint returns. This equal split accords with the per-person basis of most of these policies, which
are described below. Our individual-level earnings definition excludes other income sources and
generally ignores tax-unit sharing, which requires tax return data that is not yet sufficiently
available for 2021 (for estimates accounting for tax-unit sharing in 2020, see Larrimore,
Mortenson, and Splinter 2022b). Inflation-adjusted values are based on the chained-CPI.
Once the IRS data are complete, they represent a population-level panel. To provide timely
estimates, we use current data even though some 2021 forms are yet to be processed by the IRS.
In these data, some workers with 2021 earnings appear to have no earnings and some with multiple
jobs have just one processed Form W-2, resulting in artificially lower earnings. We account for
this by estimating the number of people with not-yet-processed 2021 W-2 forms and the earnings
on those forms. This imputation is based on historical patterns of late-processed forms based on
age, prior-year wages, and W-2 presence in the current tax year (see online appendix B for details).
Since our data (from August 2022) are nearly complete, the imputation has relatively small effects,
increasing 2021 median earnings by $100 within the bottom-quintile and about half that for higher
earnings. In our final data, aggregate real wage earnings increased by 4.9 percent between 2019
and 2021, which is close to the 4.7 percent increase in aggregate real earnings in the National
Income and Products Accounts over this period.

C. Relief Considered During Recent Recessions
In addition to unemployment benefits, we include other direct fiscal relief observed in tax
data in our post-relief earnings measure. However, many sources of direct fiscal relief are not
reported in tax data (e.g., SNAP, indirect relief via Federal Reserve policies, and indirect relief
through local programs or charitable organizations). Note that to the extent macroeconomic
policies or Payment Protection Plan forgiven loans resulted in higher wages, they are included in
our earnings measures, although not broken out, as this would require a counterfactual estimate of
lost earnings (Autor et al. 2022; Dalton 2022).
Total fiscal relief increased across the three recessions considered. Fiscal relief was about
$200 billion in 2001–2003, $500 billion in 2008–2010, and $1,800 billion in 2020–2021. 5 Larger
Covid-era fiscal relief mostly resulted from expanded unemployment insurance benefits and
stimulus payments. Unemployment insurance benefits increased from $140 billion and $350
billion in the earlier periods to $880 billion in the Covid era.
Stimulus payments also increased over the last three recessions. The 2001 stimulus payments
totaled $38 billion and approximately two-thirds of tax units received a payment of $300 per adult
(Kaplan and Violante 2014). The 2008 payments totaled $96 billion and maximum amounts were
generally $600 per taxpayer and $300 per child younger than 17 years old (Parker et al. 2013). The
2020 payments were far larger. They totaled $413 billion, including $280 billion for the first round
of payments. Most individuals received $1,800 per non-dependent filer and $1,100 per qualifying

5
Note that our panel focuses on employees and therefore excludes relief going to non-employees, such as Covid-era
unemployment benefits going to the self-employed and stimulus payments to retirees. Among workers in our data, fiscal
relief was about $170 billion in 2001–2003, $490 billion in 2008–2010, and $1,380 billion in 2020–2021 (in 2021
dollars: $240 billion, $600 billion, and $1,420 billion).

5
child. In 2021, additional stimulus payments were distributed, including $408 billion from third-
round payments that were $1,400 per non-dependent filer and qualifying child. 6 Additionally, we
account for stimulus check “true ups” on 2001, 2008, and 2020 tax returns in the year when the
payment is received (Splinter forthcoming).
Several other provisions that provided relief during the Covid Recession and Great
Recession are also included. The making work pay credit for 2010 and 2011 totaled $60 billion
each year and was $400 per adult worker (subject to an income phase out). The payroll tax holiday
for 2012 and 2013 reduced employee payroll taxes by $100 billion each year and consisted of a
two-percentage point tax rate reduction. 7 In 2021, most parents received advance child tax credits
(CTCs) of $1,800 per qualifying child under age six and $1,500 per qualifying child under age 18.
4. Estimates of Earnings Changes and Relief Across Business Cycles
To show the evolution of earnings over recent business cycles, we follow individual
workers over time. For each recession, workers are grouped into quintiles or percentiles of the pre-
recession earnings distribution (including wages plus unemployment insurance, to more closely
reflect their usual pre-recession earnings). These rankings into quintiles and percentiles are
consistent across all figures, maintaining the same rankings when looking at earnings changes with
and without relief. Importantly, our panel approach differs from evaluating trends using repeated
cross-sections because individuals are always classified into quintiles or percentiles based on their
pre-recession earnings, thereby allowing us to focus on individual-level earnings mobility.
Relative to prior recessions, market earnings changes in the Covid recession were more
regressive, but both the policy response and the Covid recovery have been more progressive. This
is seen with each of our four measures: (a) the share of workers whose earnings increased; (b)
median earnings changes within earnings groups; (c) the share of workers with large (10 percent
or more) changes in earnings; and (d) Gini-based measures summarize the progressivity of changes
across the distribution. Finally, we show how specific parts of fiscal relief, especially
unemployment insurance and stimulus payments, offset earnings declines in the Covid recession
and recovery.

A. Frequency of Earnings Increases and Declines During the Covid Recession

Across the entire population, market earnings for most workers were resilient through the
Covid recession, as 51 percent had real earnings increases in 2020. With rising inflation, the share
with real earnings above pre-recession levels ticked down slightly in 2021, but just over half (50.4

6
Most second-round payments were made in 2020 and are allocated to 2020 based on actual payment dates. The 2008,
2020, and 2021 stimulus checks were subject to income phase outs starting at $75,000 for single filers ($150,000 for
married filers). For details, see Splinter (forthcoming).
7
We estimate the individual-specific amount of this tax holiday using individual measures of earnings from Form W-2.

6
percent) still had higher earnings than in 2019. In the Great Recession a slightly smaller share, 47
percent, had earnings above their pre-recession levels in both 2008 and 2009.
Yet earnings trends differ through the distribution. When considering market earnings by
quintile of pre-recession earnings in Figure 1 (dashed lines), low-earning workers were typically
making less in 2021 than they were in 2019 before the recession. Of these bottom-quintile workers,
44 percent had higher real earnings in 2021 than two years earlier, while the rest had lower earnings.
This reflects frequent earnings declines in 2020, followed by a partial recovery in 2021. Just 41
percent of bottom-quintile workers had increases in real market earnings in 2020. For comparison,
in the first year of the Great Recession, 47 percent had earnings increases in 2008. But the Covid
recession was also historically short, and the share of bottom-quintile workers with real earnings
above their pre-recession level increased slightly in 2021. In contrast, during the Great Recession,
the share of bottom-quintile workers with earnings above pre-recession levels fell in the second and
third year after the start of the recession—past the official end date of the recession. Hence, a larger
share of low-earning workers made more in 2021 than before the recession than was the case in 2009
or 2010 following the Great Recession.
The effects of the Covid recession on market earnings were also particularly regressive.
Contrast the bottom-quintile results in the left panel with those for the top quintile on the right,
still focusing on the dashed lines (results for all quintiles are in the online data). In 2020, a majority
(57 percent) of those who started in the top quintile had market earnings gains despite the economic
downturn. In 2021, the share with real earnings gains among this group fell, although slightly over
half of these workers still had earnings above pre-recession levels.

7
Figure 1. Share of workers with real earnings at pre-recession level or higher, by income quintile
Bottom Quintile Top Quintile
2001 recession 2008 recession 2020 recession 2001 recession 2008 recession 2020 recession
75% 75%

Share with earnings above pre-recession year
with relief (solid) with relief (solid)
without relief (dashed)
without relief (dashed)
2020 2020
relief relief

50% 50%

25% 25%

0% 0%
2001 2002 2003 2008 2009 2010 2020 2021 2001 2002 2003 2008 2009 2010 2020 2021
Note: Among workers aged 25 to 99 with earnings or unemployment benefits in pre-recession year and alive at end of
specific year. Quintiles (with and without relief) are based on wages plus unemployment benefits in pre-recession years
(2000, 2007, and 2019). Earnings are indexed with the chained CPI-U. Source: Authors' calculations using tax data.
Source: Author’s calculations using Internal Revenue Service and Joint Committee on Taxation (2022) tax data.

Once incorporating fiscal relief (solid bars), however, the pattern is quite different.
Comparing the solid and dashed lines in Figure 1 highlights the progressive effect of relief in
offsetting earnings losses. Among workers who were in the bottom quintile before the Covid
recession, relief increased the share with earnings increases in 2020 by 31 percentage points—
from 41 percent to 72 percent. For the middle quintile (not shown) and the top quintile, this
increase is only 19 and 5 percentage points, respectively—an indication of progressive fiscal relief.
In 2021, the total amount of direct fiscal relief fell by about one-third relative to 2020.
Nevertheless, most low-earning workers had higher earnings with relief than before the recession.
From 2019 to 2021, earnings with relief increased for 69 percent of the bottom quintile.

B. Magnitudes of Earnings Changes
Figure 2 goes beyond the share with earnings increases to also consider the magnitude of
earnings changes. It displays median real earnings of workers in each quintile relative to their
median earnings in the year before each recession. Once again, the dotted bars only include market
earnings, and the solid bars add fiscal relief.
The Covid recession stands out for its severe effects on market earnings of low-earning
workers as well as its progressive recovery. For workers starting in the bottom-quintile in 2019,
real median market earnings in 2021 were 26 percent below 2019 levels (see dashed lines). This
reflected a decline of nearly one-third in 2020 followed by a slight increase in 2021. Among those
who started in the middle quintile, median earnings remained relatively flat, and among the top
quintile, real median earnings declined slightly in 2021. Hence, despite a progressive recovery in
2021, the combined effect on market earnings since 2019 was regressive.

8
Figure 2. Median real earnings relative to pre-recession year, by income quintile
A. Bottom Quintile

70% 2001 recession 2008 recession 2020 recession

Change in median real earnings
50%

with relief (solid)
30%
without relief
(dashed) 2020

compared to pre-recession year
10%
relief

-10%

-30%

-50%
2001 2002 2003 2008 2009 2010 2020 2021

B. Middle Quintile C. Top Quintile
20% 20%

2001 recession 2008 recession 2020 recession 15%
2001 recession 2008 recession 2020 recession
15%

Change in median real earnings
10% 10%
with relief (solid) with relief (solid)

compared to pre-recession year
without relief without relief
5% (dashed) 2020 5%
(dashed)
relief
2020
relief
0% 0%

-5% -5%
2001 2002 2003 2008 2009 2010 2020 2021 2001 2002 2003 2008 2009 2010 2020 2021

Note: Among workers aged 25 to 99 with earnings or unemployment benefits in the pre-recession year and alive at end
of specific year. Earnings are indexed with the chained CPI-U. Quintiles (with and without relief) are based on wages
plus unemployment benefits in pre-recession years (2000, 2007, and 2019). Median real earnings without relief (2021
dollars) for pre-recession years (2000, 2007, and 2019)—bottom quintile: $5,800, $5,910, $7,560; middle quintile:
$38,390, $39,480, $42,770; top quintile: $100,350, $106,850, $120,450. Relief increases median real earnings in 2021
by $6,980 for the bottom quintile, $3,120 for the middle quintile, and $1,860 for the top quintile. Source: Authors'
calculations using tax data.
Source: Author’s calculations using Internal Revenue Service and Joint Committee on Taxation (2022) tax data.

Low-wage workers benefited greatly from progressive policy responses in the Covid
recession and recovery—especially expanded unemployment benefits and stimulus checks. When
including fiscal relief, as shown in the solid bars in Figure 2, bottom-quintile workers saw their
real median earnings with relief increase by 66 percent in 2020 and then remain up 62 percent in
2021 as market earnings gains largely offset the withdrawal of fiscal relief. Middle-quintile real

9
median earnings with relief increased by 9 percent in 2020 and remained 8 percent above 2019
levels in 2021 (note the change in scale in Figure 2 for the middle and top quintiles). Top quintile
median earnings with relief increased by only 2 percent in 2020, and then returned to near-2019
levels in 2021. 8
The 62 percent median increase after fiscal relief from 2019 to 2021 for this group was
remarkably large and far exceeded that seen even during recent non-recessionary periods,
highlighting the magnitude of the progressive policy response. Since 1999, the median increase in
bottom-quintile real earnings (after relief) over a two-year period never exceeded 11 percent prior to
the Covid recession. Frequently, the median two-year change for this group was slightly negative. 9

C. Frequency of Large Earnings Changes during Covid
For some workers, increases or decreases in earnings may be small. To consider the more
dramatic effects of recessions and recoveries on workers, we also consider the share of workers
with large real annual earnings changes, excluding small changes. Large changes are defined as
10 percent or more, where large declines include those exiting the workforce (i.e., going from
positive to no earnings). Consistent with the earlier discussion, those entering the workforce are
excluded. Over the last two decades, an average of 28 percent of workers had large increases and
28 percent had large declines each year. Other estimates using administrative tax data find
similarly high shares of workers with large short-term earnings changes (Congressional Budget
Office 2008). 10
Expansions often coincide with more workers having large increases. In the 2012–2019
expansion, the share with large increases exceeded the share with large declines by an average of
3 percentage points. In 2021, the first full year of the Covid recovery, the share of workers with a
large earnings increase was 3 percentage points above the share with a large earnings decline.

8
Small business owners benefitted from forgiven Payment Protection Plan loans. Since this paper focuses on employee
wages and these loans are not captured on individual tax records, they are not included here. Autor et al. (2022)
estimated that up to one third of forgiven loans flowed through to 2020 wages (hence included in our earnings
measures), and that the rest increased top-quintile household incomes about five percent. This implies these loans
would increase our average top-quintile annual earnings changes with relief to near the fourth-quintile increase but
well below the bottom quintile’s 90 percent average increase.
9
As is standard in panel-based studies, average earnings growth was larger for low-wage workers than their median
earnings growth. This is because the panel includes people who are just starting in the workforce and because there is
mean reversion among those with temporary earnings declines. This earnings growth, however, is offset somewhat by
workers aged 60 or older with large declines (online data Table B1). When removing initial-year workers with earnings
below $5,000, bottom-quintile median earnings decreases were less common and smaller (online data Tables B4 and
B5). However, even when looking at average earnings, the increases in bottom-quintile earnings after relief in the
Covid recession exceeded other two-year periods since 1999. Bottom-quintile workers saw their real average earnings
with relief increase by 90 percent in 2020 and then increase to 107 percent above 2019 levels in 2021 (online appendix
Figure A1).
10
After controlling for age, large earnings losses are associated with unemployment spells, interstate moves, and
divorce; while large increases are associated with adding dependents and being married (Larrimore, Mortenson, and
Splinter 2016).

10
However, one-year improvements include mean reversion of prior-year losses, which is why we
also consider two-year changes. Over the two-year period from 2019–2021, large earnings
increases before fiscal relief were 1 percentage point less common than large earnings declines (34
percent vs. 35 percent). For comparison, in the pre-Covid expansion years from 2017 to 2019,
large increases were 7 percentage points more frequent than large decreases.
Next, we consider the frequency of large earnings gains and declines across the earnings
distribution. Figure 3 displays the share of workers with at least a 10 percent real earnings decline
or increase by earnings percentile.
Panel A displays the share with large annual decreases for 2019, before the Covid
recession, and for 2020 and 2021. As previously illustrated by Larrimore, Mortenson, and Splinter
(2022a), the share with large market earnings declines during the 2020 recession was elevated
throughout the distribution relative to 2019, but especially so among the bottom half of the
distribution. In 2021, the share of workers with large earnings declines for the bottom quintile is
above the 2019 analog for each earnings percentile, although the shape is similar.
Panel B shows the share of workers with large earnings increases. In 2020, the share
experiencing a large earnings increase was similar to that in 2019 for the top of the distribution but
depressed for the bottom half. The 2021 pattern was also similar for those in the top half of the
distribution, but there was a notable surge in earnings increases for those with earnings between
the 10th and 40th percentiles.
Shifting to two-year changes in Panels C and D, the progressive recovery in market
earnings somewhat offset the regressive nature of the recession. Between 2019 and 2021, 51
percent of workers who were in the bottom quintile had a large earnings decline. This is 7
percentage points above the 44 percent with large two-year earnings declines from 2017 to 2019.
Among the top quintile, the 27 percent of workers with large earnings declines between 2019 and
2021 was 3 percentage points above the share with large earnings declines from 2017 to 2019.
Similarly, large earnings increases among the top quintile were 2 percentage points less likely
between 2019 and 2021 than in the two preceding years.
However, despite being smaller than in 2020, fiscal relief continued to be extremely
progressive into 2021. Once incorporating fiscal relief, large earnings declines were far less
common among the bottom half of the distribution from 2019 through 2021 than during the most
recent expansion, and large income gains were far more common for everyone outside of the top
decile. 11 Among the bottom quintile, relief decreased the share with large declines from 51 percent
to 29 percent and increased the share with large increases from 41 percent to 65 percent.

11
Note that the progressivity of relief in 2020 is not contributing to this observed progressivity in 2021, since it only
compares calendar years 2019 and 2021.

11
Figure 3: Share of workers with large real earnings decline or increase
60 A: 10% real earnings decline: 1-year 100 B: 10% real earnings increase: 1-year

50 2019-20 80

Percent of workers Percent of workers
40 2020-21
60
2018-19 2020-21
30 2018-19
40
20
2019-20
20
10

0 0
0 20 40 60 80 0 20 40 60 80
Prior-year earnings centile (year t–1) Prior-year earnings centile (year t–1)

60 C: 10% real earnings decline: 2-year 100 D: 10% real earnings increase: 2-year

50 80
2019-21

Percent of workers
2019-21(+relief)

Percent of workers
40
2017-19 60
30 2017-19
40
2019-21(+relief) 2019-21
20

20
10

0 0
0 20 40 60 80 0 20 40 60 80
Prior-year earnings centile (year t–2) Prior-year earnings centile (year t–2)

Note: Among workers aged 25 to 99 with earnings or unemployment income in the initial year (t–1 or t–2) and alive
at end of final year. Percentiles are based on wages plus unemployment benefits in initial years. Earnings are indexed
with the chained CPI-U. Source: Authors' calculations using tax data.
Source: Author’s calculations using Internal Revenue Service and Joint Committee on Taxation (2022) tax data.

D. Progressivity of Earnings Changes and Fiscal Relief
To summarize the progressivity of earnings changes across the entire distribution, we
estimate percentage decreases in inequality for the same population. This new measure extends
Gini coefficients to a panel framework. We define the progressivity of earnings changes as the
initial-year earnings Gini coefficient less the final-year concentration index (the final-year Gini
modified to rank workers by initial-year earnings) divided by the initial-year Gini coefficient. In
the years for which data is available, this measure is always positive because earnings changes
among initial-year workers are always sufficiently progressive to overcome any increases in cross-

12
sectional inequality. 12 Progressive changes partly result from mean reversion but persist even when
controlling for observable differences such as age (Berman, forthcoming).
The experience during the Covid recession stands in contrast to recent years and recent
recessions. From 1999 through 2020, the average progressivity of one-year earnings changes was
4 percent, meaning that earnings inequality fell by this percentage when following workers for one
year. Yet between 2019 and 2020, at the start of the Covid recession, progressivity fell to a two-
decade low of 1 percent. In contrast, at the start of the 2001 recession, annual progressivity was 7
percent; and at the start of the Great recession, annual progressivity was 5 percent. Hence, the Covid
recession was more regressive than these prior recessions and more regressive than all other years
since 1999 (two-year changes show similar patterns, see online appendix Figure A4).
As discussed above, however, the regressive market earnings changes in the Covid
recession were offset by progressive fiscal relief. Between 2019 and 2021, two-year progressivity
with relief was 10 percent, or 7 percentage points above the two-year progressivity without relief.
Hence, once again we observe the extent to which the fiscal relief during the Covid recession and
recovery reduced inequality by reaching those lower in the distribution.

E. Which Fiscal Relief Measures Mattered Most?
Table 1 shows how Covid public policies reduced the share of workers with large income
declines across different years (annual and two-year changes) and between those with and without
dependents. Panel A considers annual earnings declines in the 2020 recession. Relief reduced the
share with large (10 percent or more) annual declines by 14 percentage points, from 33 percent for
earnings without relief to 19 percent with relief. Unemployment insurance benefits explain two-
thirds of this distribution-wide stabilization effect and stimulus checks explain one-third. Among
the bottom quintile, the share with large declines fell much more from fiscal relief—by 27
percentage points (from 53 to 26 percent)—where unemployment insurance and stimulus checks
each explain half of the change.
Unemployment insurance was generally more progressive than stimulus payments in
recessions. In both 2009 and 2020, the bottom quintile of adults received about one-third of
unemployment benefits, while the middle received about one-fifth and the top quintile less than
one-tenth (Larrimore, Mortenson, and Splinter forthcoming). Stimulus payment amounts, in
contrast, were about the same across the distribution except for a phase out for top income groups.
Unemployment benefits also target workers with earnings declines, whereas stimulus payments
are largely insensitive to earnings declines.

12 This measure differs from cross-sectional Gini coefficients in two ways. First, it follows the same individuals over

time, rather than incorporating population changes due to death or entry into the labor market. Second, it ranks
individuals based on their initial-year earnings rather than current-year earnings. Hence, this progressivity measure
can be thought of as the negative of the change in cross-sectional Gini coefficients if holding the population constant,
plus the progressivity from individuals changing their rank in the distribution. The reranking effect is positive by
definition (because it reduces the correlation between the ranking variable and earnings), so the progressivity measure
will be positive if either the (population constant) cross-sectional Gini falls or if the reranking effect exceeds any
cross-sectional Gini increase.

13
Panel B considers two-year earnings changes between 2019 and 2021. Relief reduced the
share with large two-year declines by 9 percentage points, from 35 percent for earnings without
relief to 26 percent with relief. Unemployment insurance benefits explain 39 percent, stimulus
checks 53 percent, and advance child tax credits 8 percent of the stabilization effect. 13 Among the
bottom quintile, the share with large declines fell by 22 percentage points due to fiscal relief (from
50 to 29 percent).
Fiscal relief disproportionately benefitted adults with dependents, especially in the bottom
quintile. For those without dependents, relief reduced the share with large two-year declines by 8
percentage points (Panel C). For those with dependents, relief reduced it by 12 percentage points
(Panel D). Among the bottom quintile, relief reduced the share with large decrease for those
without and with dependents by 19 and 28 percentage points, respectively. This difference is
largely because each tax unit received an additional $1,400 of stimulus checks for each dependent
and $1,200 per child of advance child tax credits.

Table 1. Share of workers with at least a 10 percent real earnings decline
All Among the Among All Among the
Among the
working- bottom the top working- bottom
top quintile
age adults quintile quintile age adults quintile
A: 2019–2020 (1-year) B: 2019–2021 (2-year)
Earnings 33.4 52.6 22.0 34.6 50.3 26.9
+ Unemployment Ins. 24.2 38.4 20.8 31.1 41.7 26.6
+ Stimulus checks 19.3 25.5 19.7 26.3 30.0 25.6
+ Advanced CTC
(earnings + relief)
19.3 25.5 19.7 25.6 28.8 25.3

C: 2019–2021 (2-year): No dependents D: 2019–2021 (2-year): With dependents
Earnings 36.9 52.2 30.0 29.8 45.2 21.9
+ Unemployment Ins. 33.5 44.4 29.7 26.0 34.4 21.6
+ Stimulus checks 29.3 33.4 29.0 20.1 20.9 20.1
+ Advanced CTC
(earnings + relief)
29.2 33.2 29.0 18.2 16.9 19.3

Note: Among workers ages 25 to 99 with wages or unemployment insurance in the initial year (t–1 or t–2) and alive
at end of final year. Quintiles are based on wages plus unemployment benefits in the initial year. Children include
dependents younger than 17 years old claimed on tax returns. Earnings are indexed with the chained CPI-U.
Source: Author’s calculations using Internal Revenue Service and Joint Committee on Taxation (2022) tax data.

13
When averaging these estimates with the reverse-order of adding types of relief (i.e., unemployment insurance added
last), unemployment insurance benefits explain a similar 37 percent, stimulus checks 52 percent, and advance child
tax credits 11 percent of the stabilization effect.

14
5. Summary
With a panel of tax data, we follow individuals over recent business cycles. Reflecting the
rapid pace of the economic recovery, since 2019 about half of workers had higher real earnings
(after adjusting for inflation) in both 2020 and 2021. Yet, this overall stability masks trends for
low-income workers who experienced substantial earnings declines in 2020.
However, earnings gains have been progressive in the recovery, partially offsetting the
regressive earnings losses in the 2020 downturn. Among workers in the bottom quintile before the
Covid recession, real median earnings fell 31 percent in 2020 and then increased slightly in 2021,
making it 26 percent lower than real pre-Covid earnings. The earnings increases in 2021 for this
lowest-earning group greatly exceeded that in higher earnings quintiles, although the two-year
earnings change still lags behind those who entered the recession with higher earnings.
Progressive policy responses, especially from expanded unemployment benefits and
stimulus checks, also offset initial market earnings losses. When including fiscal relief, bottom-
quintile workers saw their earnings increase substantially in 2020 and then stabilize in 2021 as
market earnings gains offset the withdrawal of fiscal relief. We contrast these findings with the
2001 and 2008 recessions. In these earlier recessions, earnings changes were more proportional over
the distribution and fiscal relief had only modest effects. Consequently, the distributional impacts of
the Covid recovery and policy response have been far more progressive than in prior recessions.

15
References
Autor, David, David Cho, Leland D. Crane, Mita Goldar, Byron Lutz, Joshua Montes, William B.
Peterman, David Ratner, Daniel Villar, and Ahu Yildirmaz. 2022. “The $800 Billion Paycheck
Protection Program: Where Did the Money Go and Why Did It Go There?” Journal of Economic
Perspectives 36 (2): 55–80.
Bartik, Alexander, Marianne Bertrand, Feng Lin, Jesse Rothstein, and Matt Unrath. 2020. “Measuring
the Labor Market at the Onset of the COVID-19 Crisis.” Brookings Papers on Economic Activity
2020(2): 239–268.
Berman, Yonatan. 2020. “The Distributional Short-Term Impact of the COVID-19 Crisis on Wages in
the United States.” Working Paper.
Berman, Yonatan. Forthcoming. “Absolute Intragenerational Mobility in the United States, 1962–
2014.” Journal of Economic Inequality. https://doi.org/10.1007/s10888-022-09529-7.
Blanchet, Thomas, Emmanuel Saez, and Gabriel Zucman. 2022. “Real-Time Inequality.” NBER
Working Paper 30229.
Busch, Christopher, David Domeij, Fatih Guvenen, and Rocio Madera. 2021. “Skewed Idiosyncratic
Income Risk over the Business Cycle: Sources and Insurance.” American Economic Journal:
Macroeconomics 14(2): 207–242.
Cajner, Tomaz, Leland D. Crane, Ryan A. Decker, John Grigsby, Adrian Hamins-Puertolas, Erik
Hurst, Christopher Kurz, and Ahu Yildirmaz. 2020. “The US Labor Market during the Beginning
of the Pandemic Recession.” Brookings Papers on Economic Activity 2020(2): 3–33.
Chetty, Raj, John N. Friedman, Nathanial Hendren, Michael Stepner, and the Opportunity Insights
Team. 2022. “The Economic Impacts of COVID-19: Evidence from a New Public Database Built
Using Private Sector Data.” NBER Working Paper no. 27431.
Cortes, Guido Matias, and Eliza C. Forsythe. 2021. “Impacts of the Covid-19 Pandemic and the
CARES Act on Earnings and Inequality.” Working Paper.
Cortes, Guido Matias, and Eliza Forsythe. 2022. “The Heterogeneous Labor Market Impacts of the
COVID-19 Pandemic.” ILR Review. https://doi.org/10.1177/00197939221076856
Dalton, Michael. 2022. “Putting the Paycheck Protection Program into Perspective: An Analysis
Using Administrative and Survey Data.” BLS Working paper 542.
Fitzgerald, John, Peter Gottschalk, and Robert Moffitt. 1998. “An Analysis of Sample Attrition in
Panel Data: The PSID.” Journal of Human Resources 33(2): 251–299.
Greig, Fiona, Erica Deadman, and Tanya Sonthalia. 2022. “Household Pulse: The State of Cash
Balances at Year End.” www.jpmorganchase.com/institute/research/household-income-
spending/household-pulse-cash-balances-at-year-end#finding-1
Guvenen, Fatih, Serdar Ozkan, and Jae Song. 2014. “The Nature of Countercyclical Income Risk.”
Journal of Public Economics 122(3): 621–660.
Internal Revenue Service and Joint Committee on Taxation. 2022. “5-Percent Individual Sample
from IRS tax document population.” Last updated August 18, 2022. (accessed October 5, 2022).
Kaplan Greg, and Giovanni L. Violante. 2014. “A Tale of Two Stimulus Payments: 2001 versus
2008.” American Economic Review 104(5): 116–121.

16
Larrimore, Jeff, Jacob Mortenson, and David Splinter. 2016. “Income and Earnings Mobility in U.S.
Tax Data.” Federal Reserve Bank of St. Louis and the Board of Governors of the Federal Reserve
System (eds.) Economic Mobility: Research & Ideas on Strengthening Families, Communities, &
The Economy 481–516.
Larrimore, Jeff, Jacob Mortenson, and David Splinter. 2020. “Presence and Persistence of Poverty in
US Tax Data.” NBER Working Paper 26966.
Larrimore, Jeff, Jacob Mortenson, and David Splinter. 2022a. “Earnings Shocks and Stabilization
During COVID-19.” Journal of Public Economics 206: 104597.
Larrimore, Jeff, Jacob Mortenson, and David Splinter. 2022b. “Income Declines During COVID-19.”
AEA Papers & Proceedings 112: 340–344.
Larrimore, Jeff, Jacob Mortenson, and David Splinter. Forthcoming. “Unemployment Insurance in
Survey and Administrative Data.” Journal of Policy Analysis and Management.
McKinney, Kevin L., John M. Abowd, and Hubert P. Janicki. Forthcoming. "U.S. Long-Term
Earnings Outcomes by Sex, Race, Ethnicity, and Place of Birth," Quantitative Economics.
Meyer, Bruce D., Connacher Murphy, and James X. Sullivan. 2022. “Changes in the Distribution of
Economic Well-Being During the COVID-19 Pandemic: Evidence from Nationally
Representative Consumption Data.” NBER Working Paper 29878.
Meyer, Bruce D., Derek Wu, Grace Finley, Patrick Langetieg, Carla Medalia, Mark Payne, and Alan
Plumley. 2020. “The Accuracy of Tax Imputations: Estimating Tax liabilities and Credits Using
linked Survey and Administrative Data.” NBER Working Paper 28229.
Moffitt, Robert A. and James P. Ziliak. 2020. “COVID-19 and the US Safety Net.” Fiscal Studies
41(3): 515–548.
Montenovo, Laura, Xuan Jiang, Felipe Lozano Rojas, Ian M. Schmutte, Kosali I. Simon, Bruce A.
Weinberg, and Coady Wing. 2020. “Determinants of Disparities in Covid-19 Job Losses.” NBER
Working Paper 27132.
Parker, Jonathan A., Nicholas S. Souleles, David S. Johnson, and Robert McClelland. 2013.
“Consumer Spending and the Economic Stimulus Payments of 2008.” American Economic
Review 103(6): 2530–2553.
Rothbaum, Jonathan and Adam Bee. 2021. “Coronavirus Infects Surveys, Too: Nonresponse Bias
During the Pandemic.” Census Bureau Working Paper SEHSD WP2020-10.
Semega, Jessica and Melissa Kollar. 2022. “Income in the United States: 2021.” Census Bureau
Report P60-276.
Splinter, David Splinter. Forthcoming. “Stimulus Checks: True-Up and Safe Harbor Costs.” National
Tax Journal.

File and source

File: earnings-business-cycles-the-covid-recession-recovery-and-policy-response.pdf
Size: 406,791 bytes
SHA-256: 747f85bd22c6b1167c67e2901acea779f7cb7a877561d9dabaff447988e4deff
Our copy: earnings-business-cycles-the-covid-recession-recovery-and-policy-response.pdf
Original: www.federalreserve.gov