24 January 2022
"The record of history is absolutley crystal clear, there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system." ― Milton Friedman
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This week’s Marshall’s Thoughts are written by Jiong Han.
A recent report by Oxfam revealed a startling statistic – that the wealth of the world’s ten richest men had doubled during the COVID-19 pandemic. When we hear numbers like these, it seems that the pandemic has worsened inequality within countries. However, actual data appears to be more mixed – some aspects of the pandemic, including the fiscal response as well as the tightening of labor markets in advanced economies, might have mitigated or even reduced income inequality, even as wealth inequality has risen. This article seeks to unpack the immediate and long-term distributional effects of the pandemic on income and wealth.
The brunt of economic restrictions caused by COVID were undoubtedly borne by low-income workers, as work in low-wage jobs like food and beverage, retail and private transportation were almost impossible to perform remotely. Many low-income workers are also employed under flexible arrangements like zero-hours contract which do not include a minimum number of working hours, making their earnings very sensitive to demand shocks. Various studies since the beginning of the pandemic have shown that younger and low-income workers were much more likely to have lost their job or suffered a reduction in working hours.
On the other hand, high-income professionals, whose work were more amenable to digitalization, were not just more likely to retain their jobs amid the pandemic, but also often benefitted from it. The difference is stark – in European countries, 74% of workers in the top income quintile could work remotely compared to 3% of workers in the bottom quintile. Furthermore, job markets for many of these workers were no longer geographically restricted, allowing the most productive workers to access lucrative job opportunities elsewhere. Without fixed working hours, some took on multiple jobs simultaneously. Others took advantage of the flexibility of remote work to relocate to areas with lower costs of living while drawing the same pay.
In general, however, it seems that discretionary fiscal policy has cushioned the income inequality brought about by the pandemic, and possibly even reversed it in some countries. Policies to protect jobs and livelihoods such as the furlough scheme or the US’ Paycheck Protection Program likely blunted the pandemic’s impact on lower-income workers, though the latter may not have been very progressive, given that it subsidized business owners regardless of intention to retrench. In the US, the additional unemployment benefits provided increased the median replacement rate to 120%, implying that an unemployed person was receiving more in benefits on average than their former earnings. A study of Spain, Germany, France, and Italy showed that the initial increase in income inequality was more than offset by fiscal transfers by September 2020.
Nevertheless, we should also consider the impact of the pandemic on wealth inequality. High-income households tend to hold assets like stocks and equity, while for the poor, most of their wealth lies in the value of their homes and bank deposits. For the well-off, the value of their existing wealth was likely eroded by a large extent at the start of the pandemic with the sharp fall in stock prices. However, wealthier households also amassed more additional savings during the lockdowns, as they disproportionately affected services, which account for a much larger share of expenditure for the high-income. Furthermore, unconventional monetary policy such as quantitative easing also favored the well-off, as the large-scale asset purchases primarily benefitted holders of longer-term assets. Housing prices have also risen sharply as mortgages became cheaper and institutional investors new sources of return – which could exacerbate wealth inequality in countries without broad-based home ownership.
Hence, there seem to be interesting tradeoffs for government policy during the pandemic. For instance, QE might have increased wealth inequality, but could have averted a more prolonged and severe recession. In fact, various economists like Draghi have argued that since the costs of recessions such as increased unemployment are largely concentrated among the poor, looser monetary conditions could have an overall effect of reducing income inequality. Similarly, cash handouts could reduce income inequality and buffer the fall in consumption for the credit-constrained but could be absorbed by high earners as increased savings, hence worsening wealth inequality.
A few longer-term trends also merit close watching for their effect on inequality. First, it appears that labor markets have tightened significantly during the pandemic. Many people have left their jobs permanently in what is known as “The Great Resignation” in the US – whether this is merely short-term hysteresis or the result of fundamental changes in preferences is yet unknown. However, this has increased the bargaining power of labor and led to substantial pay rises for workers in various lower-wage sectors ranging from hospitality to HGV driving. On a related note, there has also been a sharp rise in inflation which has eroded wage increases and is also likely to have further distributional effects, both on wealth and income. Finally, the heterogeneous effects of the pandemic on schooling for different communities will likely have long-term ramifications on income inequality and related issues like social mobility.
So, how has the pandemic affected inequality? As Zhou Enlai famously responded when asked about the impact of the French Revolution, it may be too early to tell. The pandemic is clearly not over yet. The tentative signs thus far points in the direction of a rise in wealth inequality, and a slight fall in income inequality, though this may reverse as generous support measures come to an end and as various long-term trends play out. Watch this space.
In Case You Missed It:
Permian Basin: high oil prices breathe life into American shale | Financial Times Oil prices are rising once more. This interesting article examines of the economics of oil production in America and examines various factors that will likely affect the future growth of the shale oil industry, ranging from the green transition, price decisions by OPEC, and a renewed demand for profitability by institutional investors.
The IMF bashes the IMF over Argentina | The Economist The IMF has a long history of lending to Argentina conditionally, but not always succeeding in its interventions – since 1956, it has had to bail Argentina out 21 times. This thought-provoking article summarizes an internal report by the IMF critiquing its bailout of Argentina in 2018 and examines likely reasons for the policy failure. There is an intriguing discussion of some of the political constraints behind negotiations, with both parties not always being aligned in their interests and objectives.
Consumption inequality in the digital age | Vox EU The effect of digitalization on income inequality is well-studied, but its effect on consumption also depends on price changes. In this insightful piece, Kai Arval and Katja Mann argue that differences in composition of consumption baskets between low- and high-income households cause the consumption of both groups to be affected differently when “ICT-intensive products” become cheaper.
That's it from us for now!
The Marshall Society