Understanding the impact of Covid-19 on income: labour market changes and policy solutions


An accurate picture of the distribution of household incomes post-pandemic is needed in order to examine the impact of the pandemic on household incomes and to assess the effectiveness of policy to tackle these issues. However, comprehensive data on household incomes has a lag of at least a year. This report examines trends in the labour market over the course of the pandemic and provides estimates of household incomes at the start of the financial year 2022-23. It further models the effects of any changes in estimated income on income distribution, poverty, and inequality in Scotland, and examines the effects of a small number of tax and benefit policies using microsimulation methods.

Labour market trends 2019-22

This part of the report examines trends in employment, pay, and work hours for Scottish adults aged 16-64, divided into groups defined by age, gender, and level of education. We find that:

  • Employment and unemployment rates for men 25 and older with less than degree-level qualifications worsened during the pandemic and have not recovered, while men with degrees or higher education qualifications and most women have returned to pre-pandemic levels of employment.
  • Weekly hours worked by those in employment fell during the pandemic and had recovered by the beginning of 2022.
  • Real weekly pay remained mostly steady for those in employment through the pandemic, but began to fall towards the end of 2021 as inflation increased. This points to the efficacy of furlough schemes for maintaining income for those in employment, but does not say anything about the income of those that were unemployed or became inactive during the pandemic.

Income, poverty, and inequality in 2022-23

In the second half of the report, we “update” Family Resources Survey (FRS) and Households Below Average Income (HBAI) data to reflect labour market statistics by group at the beginning of 2022. We then use the IPPR tax-benefit microsimulation model to estimate average household incomes, income distribution, poverty, and inequality in 2022-23. Finally, we perform microsimulations of the effects of several tax and benefit policies on the updated data. We find that:

  • Incomes overall have risen since just before the Covid-19 pandemic, particularly for households at the lowest end of the income distribution. The increase is driven by higher earned income for most types of households.
  • As in our labour market analysis, single working-age males (16-64) are the only group with lower earned income post-pandemic, caused by reduced employment rates.
  • Relative poverty rates have fallen very slightly for most groups, particularly children (by 0.6pp), but the changes disappear when figures are rounded to the nearest percent. The largest decreases by household type are a 1pp decrease in the relative poverty of single working-age female households, consistent with their increased employment. Single working-age males and mixed pensioner and working-age adult households see a slight rise in relative poverty.
  • Higher earned incomes bring some households out of relative poverty, but these households remain close to the poverty line. Even small changes in tax policy may have noticeable effects on relative poverty rates, particularly if tax rate changes elicit a behavioural response.

We include with the report a technical note on the process of updating FRS and HBAI data using reweighting.

This project was funded by the Scottish Government Covid-19 Learning and Evaluation Oversight Group.


Emma is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute

Hannah is an Associate at the Fraser of Allander Institute. She specialises in applied social policy analysis with a focus on income, poverty, and inequality.

David is Senior Knowledge Exchange Fellow at the Fraser of Allander Institute