Automatic stabilisers, economic crisis and income distribution in Europe


This chapter investigates to what extent the tax and transfer systems in Europe protect households at different income levels against losses in current income caused by economic downturns like the present financial crisis. We use a multi-country microsimulation model to analyse how shocks on market income and employment are mitigated by taxes and transfers. We find that the aggregate redistributive effect of the tax and transfer systems increases in response to the shocks. But the extent to which households are protected differs across income levels and countries. In particular, there is little stabilization of disposable income for low-income groups in Eastern and Southern European countries.

Research Highlight 2011

Automatic stabilisers and economic crisis: US versus Europe

This paper analyses the effectiveness of the tax and transfer systems in the EU and the US to provide income insurance through automatic stabilisation in the recent economic crisis. We find that automatic stabilisers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock, 47 per cent of the shock is absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilisation of up to 30 per cent in the EU and up to 20 per cent in the US. There is large heterogeneity within the EU. Automatic stabilisers in eastern and southern Europe are much lower than in central and northern European countries. We also investigate whether countries with weak automatic stabilisers have enacted larger fiscal stimulus programs.
Clemens Fuest


See also:

Wie wirken die automatischen stabilisatoren in der Wirtschaftskrise? Deutschland im Vergleich zu anderen EU-Staaten und den USA’ Perspektiven der Wirtschaftspolitik 11, S. 132-145.

Automatic stabilisers and the economic crisis in Europe and the US’, VoxEU, September  17.


Clemens Fuest, Andreas Peichl, and Mathias Dolls