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COVID-19 Economics

COVID-19: Rising Inequalities

At this point, almost every nation in the world has enforced strict lockdown measures in an effort to ensure social distancing and in turn minimize the spread of COVID-19. As a result, global and local economic engines have sputtered to a halt causing one of the biggest and novel recessions we have faced in decades. Yet although there’s much talk about the health and economic crises caused by COVID-19, the rise in inequalities we are beginning to see today is one of the major consequences of this catastrophe that could greatly affect the way in which we shape our social, economic and political systems in a post-crisis world. Moreover, COVID-19 and the ensuing lockdowns are exacerbating inequalities not only between households, but also between firms and nations. In this post, I’ll walk you through the different dimensions through which inequality is rising along with some potential solutions and the wider implications of all this for the future.

Why are Rising Inequalities Concerning?

Before we begin considering how inequality is rising and how we can solve the problem, it’s important to understand why rising inequalities are a concern. A major concern with increased inequality is the unrest and instability that it can cause. When resources are not allocated equally and a small minority controls a majority of a nation’s wealth and productive resources, we begin to see increased crime rates and social unrest as communities become desperate for survival. In turn this unrest can lead to major social uprisings, political instability and in extreme cases even revolution. For example, back in the late 18th century, rising inequality between an elite minority led by King Louis XVI and Marie Antoinette and a majority in extreme poverty caused the French Revolution, which transformed France’s political, economic and social systems from one based on a monarchy into one based on social democracy.

In addition to fuelling unrest and instability, inequality usually signifies high levels of unemployment, low levels of human capital development, and an underutilization of resources – all of which suggest low levels of economic growth and development. In fact inequalities are such a major concern that reducing inequalities is not only one of the four macroeconomic objectives pursued by central banks and governments worldwide, but also one of the United Nations’ Sustainable Development Goals for 2030. Considering all this, rising inequalities should be a concern for even the most die hard capitalists out thereā€¦

Increasing Inequalities between Households

COVID-19 is increasing inequalities between households across three different dimensions. The first is with regards to health, the second is related to work and the last is in the domain of education.

Inequality in Health

COVID-19 Death Rate with Pre-Existing Conditions

Firstly when we look at the inequalities in health, in most nations members of low income earning households are far more likely to suffer from preexisting health problems like diabetes, asthma or heart conditions due to poor working conditions, or diet. The graph above illustrates how the fatality rate of COVID-19 varies for patients with different pre-existing health conditions and it clearly shows that the disease can be over ten times more fatal if you have pre-existing health conditions. Therefore, when we take these factors into consideration from a purely mathematical standpoint, it’s clear that the underlying risk of COVID-19 is far greater for these low income earning households since the disease is far more dangerous for people with these preexisting conditions. Moreover, the underlying risk could be higher even without any pre-existing health concerns since low-income earning households will likely have lower access to testing and/or healthcare. This inequality in health is starting to show itself in demographic data; for example, the African-American community in the US, which has one of the lowest median incomes, makes up 33% of hospitalized COVID-19 patients despite the fact that the African-American community represents just 13% of the US population.

COVID-19 Impact on African-Americans

Inequality in Work

The lockdowns imposed to minimize the spread of COVID-19 and the ensuing economic shut downs have put everyone in the world’s labor force in one of three situations. Everyone in the labor force is now either working from home, continuing work as usual as an essential worker, or unemployed. Although working from home is ideal as it keeps workers productive and the economic engine running, unfortunately only a wealthy white-collar minority have access to work from home. Despite recent innovations in high-speed connectivity and communications technology, only around 30% of the labor force in developed countries can work from home and this number is bound to be smaller in developing economies. Therefore, although work-from-home facilities are keeping some productive, they are increasing inequalities between households since it secures the livelihoods of high-income earning households while the livelihoods of low-income earners are affected because work-from-home isn’t an option.

Access to WFH

Since working from home is not an option for most low-income earning households, they are either essential workers or unemployed. Although essential workers, from food suppliers to health workers to security personnel, are keeping the world running amidst this COVID-19 crisis, they are on the front lines and in turn are far more likely to get infected with COVID-19. This is even more concerning given the fact that a majority of the essential workers outside of the healthcare service are low wage earners. Therefore, yet again this suggests that low-income earning households are far more vulnerable to the disease.

Over the course of the last few weeks, the COVID-19 shutdown has led to unprecedented increases in unemployment worldwide. The figure below, which illustrates unemployment claim data in the US, clearly show that the current economic crisis has led to a massive increase in unemployment even compared to major economic crises like the 2008 Financial crisis. One explanation for this increase in unemployment is the fact that many businesses have had to shut down and let their employees go as a result of sustained losses due to the current economic environment. For example, since the travel and tourism industry has ground to a halt, airlines all over the world have had to ground their flights and retrench thousands of their employees.

Another explanation relies on understanding the importance of the Gig Economy. The Gig or Informal Economy is made up of self-employed workers whose livelihoods rely on flexible, temporary or freelance jobs that are often not protected, regulated or documented by the government. Everyone from photographers and musicians to truck drivers, carpenters and Uber drivers make up the gig economy. The gig economy is becoming increasingly important everywhere with the rise of services like Uber, but it’s especially important in developing countries, where it employs around 40-50% of the total labor force. With the current lockdown measures in place however, almost all of these gig workers have become unemployed and fallen through the cracks since their jobs are not regulated by labor laws and they are not entitled to most unemployment benefits. Nevertheless, be it through the fall of major firms, or the gig economy, the increase in unemployment we are seeing today will no doubt increase inequalities between households.

Inequality in Education

Although schools, universities and other educational institutions have had to close their campuses to minimize the spread of the virus, some wealthy private schools have already moved to online or distance learning programs. But just like with work-from-home, online learning is not an option for all due to disparities in access to internet, hardware and digital educational content between high and low-income earning households. Moreover, even without online learning, students in high-income earning households are more likely to learn more away from school during this lockdown period compared to students in low-income earning households.

In his book “Outliers,” Malcolm Gladwell cites a study done by researchers at Johns Hopkins University, where 650 students from low, medium and high income earning households were given a standardized math and reading skills exam at the start and end of each academic year from 1st grade to 5th grade. The study revealed that the students from low and medium income earning households improved by the same amount or more during every academic year compared to the wealthy students. However, at the end of the 5 years the wealthy students still outperformed the rest because they made far more progress during the 2-month-long summer vacation between grades compared to the poorer students because there was more learning going on at their homes. Therefore, with schools closed for an extended period of time during this COVID-19 crisis, there could be an increase in inequality in education as students from high income earning households keep learning from home, while students from low income earning households stop.

Increasing Inequalities between Firms

Almost every firm is facing a challenge due to severe declines in consumer demand and in some cases faults in their supply chains. Despite this however, inequalities between firms are on the rise as larger firms with more market share are far more equipped to face and overcome these challenges. Since they have more resources, larger firms can tolerate longer periods of losses. Moreover, the chance of larger firms staying alive amidst this crisis is much higher when compared to small and medium size enterprises because they have more access to credit and significant bargaining power with financial institutions, government and trade unions. These inequalities will likely lead to the shut down of many small and medium sized enterprises, which will lead to the creation of powerful and inefficient monopolies and further increase inequalities between households since monopolies are notorious for redistributing wealth from poor consumers to rich monopolists.

Increasing Inequalities between Nations

In addition to rises in inequality between households and firms, the COVID-19 crisis is exacerbating inequalities between developed nations and developing nations across two key dimensions: healthcare and the ability to deal with the current economic crisis. In terms of healthcare, the impact of COVID-19 will be far greater for developing nations compared to developed nations because their healthcare systems are far more underdeveloped. Moreover, COVID-19 is likely to infect many more people in developing nations due to high levels of population density. For example, Bangladesh has a population density of 1116 people per square kilometer while Norway has a population density of just 15 people per square kilometer. Therefore, developing countries are likely to exceed developed countries in terms of the number of confirmed cases and fatalities.

Population Density

Despite developing countries’ unequal vulnerability to COVID-19 however, most developing countries will not be able to implement health policies as dramatic as those implemented in developed nations. This is because the informal or gig economy plays a far bigger role in developing nations and the fact that governments don’t have trillions to inject as fiscal and monetary stimulus. In fact, even while keeping shut downs to a minimum, emerging economies are already struggling due to massive capital outflows from their nations as a result of declining investor confidence, and decreasing export revenue. This has led to a decline in foreign exchange reserves and currency depreciation in many countries. Moreover, developing countries will have a much harder time getting access to credit and will probably have to finance their budget deficits with more high interest rate loans. Over 90 nations have already reached out to the International Monetary Fund in search of credit and support to keep their economies running. Inequalities between developed and developing nations will rise even further if this crisis leads to a shift towards protectionism over international trade and globalization. Considering all this, if the current COVID-19 crisis continues for a prolonged period we may see many nations going through debt crises and sovereign defaults. There will be an increase in inequalities between nations not only in terms of deaths, but also in terms of debts.

Solutions and Implications

UBI

One solution to all this rising inequality many have been calling for is the implementation of a Universal Basic Income(UBI) program, where everyone gets a fixed payment from the government on a monthly basis with no strings attached. Proponents of UBI argue that having a UBI scheme will give people a safety cushion and minimize the impact of crises like COVID-19 on aggregate demand. However, although UBI may help the most vulnerable communities in a crisis like this one, implementing a blanket policy like UBI for everyone doesn’t do much to reduce inequalities since it does not lead to any reallocation of wealth. In fact, in such a crisis UBI is highly inefficient, since governments need to allocate their resources towards the households and firms that need it most rather than giving out a share for everyone.

Although UBI may not be the solution, the rising inequalities and increased government deficit spending amidst this COVID-19 crisis will probably lead to increased progressive taxation, where high-income earning households pay a higher proportion of their income in taxes than low-income earning households. Likewise we may see developed nations stepping up to increase the power of organizations like the IMF so that developing nations can easily gain access to credit and inequalities between nations decline. All this may come with a shift in our social, economic and political systems towards the left in favor of increased equality just like after the French Revolution.

Income Inequality Trend

In fact, as seen in the figure above, we have seen an increase in equality after catastrophes like World War I, The Great Depression and World War II took place during the first half of the 20th century. This is because a significant amount of capital owned by the wealthy at the time was destroyed, and these catastrophes pushed nations towards the left in favor of increased taxation and welfare for its people. Similarly, although COVID-19 may increase inequality between households, firms and nations in the short-run, it may very well give the world an opportunity to reboot with transformational policies and systemic changes that lead to reduced inequality in the long run.

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