How resilient are EU welfare systems to unemployment shocks? A stress-testing exercise across 27 Member States

The capacity of the tax-benefit system to smooth the impact of large economic shocks on household income represents a cornerstone of welfare state performance. In the aftermath of the financial crisis and the Covid-19 pandemic, EU Member States were put under a stress test that resulted in different outcomes depending on the policies in place. In the present paper, we stress-test the tax-benefit systems of all 27 EU Member States under hypothetical unemployment shocks using EUROMOD microsimulations. In addition, we provide results on poverty and fiscal costs, and we extend the analysis to look at the evolution over the periods 2014, 2019 and 2025 to test temporal stability. We find that tax-benefit systems absorb approximately 44% of the market-income loss in the EU, with variation from 17% in Bulgaria to 61% in Belgium. The coefficient is flat across shock magnitude and across the working-age income distribution. However, the flat profile conceals an inversion of the instrument mix along the income distribution. Income taxation provides most of the stabilisation at the top quintile, whereas unemployment benefits and social assistance contribute the most to the stabilisation at the bottom. On average, taxes and social security contributions account for 70% of the total stabilisation at the EU-27 level, while benefit-side instruments account for 30%. Our results also suggest that although the aggregate coefficient has not changed significantly over the decade, its composition has shifted, observing an average decline in unemployment benefits and a rise in social assistance and housing benefits. The findings point at Member States with minimal benefit-side stabilisation presenting the most acute vulnerability.