Covid-19 leaves a legacy of increased inequality

By Ryan Avent: economics correspondent, The Economist

WITH ANY luck, covid-19 will prove less of a disruption in 2021 than it did in 2020. But even if a vaccine allows societies to inch back towards some kind of normality, the long-run economic costs of the pandemic will mount. As the data flow in, they will reveal a dramatic rise in inequality which may persist for decades.

Inequality, though far from a solved problem, came to look a bit more manageable in the years before the pandemic. A slow but steady strengthening of labour markets in the wake of the global financial crisis eventually yielded healthy wage gains for workers across the income distribution, and measures of inequality in many economies levelled off or even declined a little as the 2010s neared their end. At first, covid-19 did not disrupt this trend much, thanks to generous aid packages provided by governments around the world. In America, for instance, stimulus measures worth about 13% of GDP even raised the incomes of some low-wage workers during the pandemic’s first few months.

By the end of 2020 the picture already looked quite different. Just how different will begin to become clear in 2021. Economic analysis of pandemics over the past century suggests that they lead to sharp rises in inequality. Five years after a pandemic begins, Gini coefficients (a measure of income dispersion) typically remain about 1.25% above the pre-crisis level: a striking rise for what is typically a slowly evolving variable. Among people with middling to high levels of education, the share of people in work scarcely budges as a consequence of a pandemic, but among those with low levels of education it typically declines by 5%. This time will be no different.

Sustaining generous fiscal-relief measures is difficult at any time, and 2021 will mark a return to more normal government budgets even as covid-19 continues to squeeze economies. In America political polarisation in the aftermath of a bitterly fought election, and concern over historically high levels of public debt, will limit the size of any new stimulus. Meanwhile, state and local government budgets will be cut dramatically after a year of depressed tax receipts. In 2020 European governments waived fiscal rules to give themselves more flexibility to respond to the pandemic. In 2021 pressure to bring borrowing back within allowable levels will rise.

The phasing-out of income support and cuts to public services will have a disproportionate impact on poorer households. Reduced aid will be especially painful given the way in which covid-19 affects economies. For high-wage white-collar workers, remote work is often a good substitute for going into the office. Blue-collar work, in manufacturing or services, is much less flexible. And if widespread remote working becomes a permanent feature of post-covid economies, many low-wage jobs destroyed by the pandemic will never return.

Those on low incomes who are fortunate enough to find employment face other inequities. Greater dependence on in-person forms of work puts the low-paid at higher risk of exposure to covid-19. And as the pandemic keeps children out of schools, many poorer workers face a terrible choice between going to work or looking after their children’s education. The digital divide, too, weighs on low-income students without access to online resources or reliable high-speed internet. But the most important and distressing source of pressure on poorer families will be the return of persistently high levels of joblessness. For many low-wage workers, 2021 will be another year of struggle.

Ryan Avent: economics correspondent, The Economist ■

This article appeared in the Finance section of the print edition of The World in 2021 under the headline “Unequal impact”