How to Nowcast Uncertain Income Shocks in Microsimulation Models? Evidence from COVID-19 Effects on Italian Households

This paper addresses how to nowcast household income changes in a context of generalized but asymmetric economic shocks like the COVID-19 pandemic by integrating real-time data into microsimulation models. The analysis provides an accurate assessment of distributional impacts of COVID-19 and Italian policy responses during 2020, thanks to quarterly data on the turnover of firms and professionals and on costs (goods, services and personnel). Thanks to these data, we can nowcast both the income dynamics of the self-employed and entrepreneurs and the wage-supplementation scheme for working time reduction, as well as all the other interventions based on turnover variations. The nowcasting procedure applies the firm-level data to the TAXBEN-DF microsimulation model (Italian Department of Finance) already relying on a particularly rich and update database of survey and administrative data at individual level that makes it an almost unique model of its kind. Results suggest that policy measures in response to the first pandemic year have been effective in keeping overall income inequality under control, while not yet being able to avoid a concerning polarization of incomes and large heterogeneous effects in terms of both income losses and measures’ compensation.