Measuring the impact of the crisis on unemployment and household income

The current economic crisis has significantly increased unemployment rates and its effect is more persistent than expected, leading to an increase in long term unemployment and inactivity. Among other effects, the experience of unemployment results in a decrease in purchasing power, a loss of human capital, a discouraging effect among the long-term unemployed and the inactive as well as wide-ranging social costs as a worsening of inequality and well-being indicators. The assessment of the costs of unemployment on individuals and households' living conditions is usually carried out using microeconomic data from household surveys that are however issued with delay. Hence, they do not allow for a prompt analysis of the impact of the economic cycle to guide policy makers. In the case of the European Income and Living Conditions Surveys (EU SILC) the data are available with a delay of at least one year and, additionally, we have to consider that the income data refers to the year before the survey (for instance, in the Italian case the last available microdata at the moment of writing this paper are from 2011). To solve this problem we carried out a microsimulation analysis using the European Statistics on Income and Living Conditions Surveys together with the Labour Force Survey (LFS) microdata. Therefore, we propose a methodology based on different sources of microdata that could provide the analysts and the policy makers with a more immediate analysis of the costs of unemployment. This would prove to be extremely useful in a time of high unemployment and budgetary restrictions as the one in which we find ourselves in today. The microsimulation technique developed in this paper is based on the imputation of transition probabilities and simulated income. Unlike other techniques such as the re- weighting approach, the microsimulation technique adopted here allows us to take into account the changes occurred in the composition of the unemployed. To test the validity of the proposed methodology we apply it to Italy, a European country severely hit by the crisis. We focus on the Italian economy since this country is a member of the Eurozone and its labour market has particular structural characteristics: a high degree of inflexibility in wage determination, rigidity in hiring and firing practices, very low achievement in terms of female labour-force participation and a strong duality between fixed-term and open-ended contracts. The country has an employment protection system corresponding to the Mediterranean model that is characterized by a rather low coverage of unemployment benefit moreover, the wide use of temporary contracts in hiring young workers to avoid the much higher dismissal costs of permanent contracts coupled with the deep recession, have resulted in a youth unemployment rate standing well over the European average. In Section 2 we introduce the methodology that will be used to microsimulate the effect of the crisis on income distribution and income poverty in Section 3 by relying on European surveys. In order to check its validity, we do progress with its application to Italy in Section 4. The final section will offer conclusions.