In the past few weeks, I have written about how we should “rebuild better” economies after the coronavirus crisis, and be more ambitious than just trying to restore the status quo ante. Underlying this is the perception that the pandemic and the economic lockdown exacerbate existing tensions in the economy — the inequalities, polarisation and erosion of a sense of belonging that have fuelled political turmoil for years.
A torrent of new studies document that this perception is correct. That may not be surprising, but it is still shocking to see the numbers come in. So consider this Free Lunch an intermission in the “rebuilding better” series in order to share those findings.
In the UK, the New Economics Foundation has found that 1.6m people are at very high risk of both losing work and missing out on the government’s support schemes. This high-risk group disproportionately comprises relatively vulnerable participants in the labour market: the young are more highly represented than prime-age workers, women more than men, and non-white more than white workers.
This is echoed in the Resolution Foundation report we mentioned in an earlier Free Lunch, and also in a study by McKinsey, which uses a broader definition of exposure to identify a group of 7.6m at-risk jobs. These jobs are disproportionately lower-paid, more concentrated in poorer locations, and more likely elementary and part-time than professional and full-time. In other reports, McKinsey has found similar patterns for the EU and US labour markets: one-quarter to one-third of jobs are vulnerable, and the low-paid and small businesses account for a disproportionate number.
Just how bad things are in the US is revealed by a fresh University of Chicago working paper by Tomaz Cajner and others, which uses weekly payroll data to measure the employment collapse. Overall “private-sector employment contracted by about 22 percent between mid-February and mid-April”, but not all jobs are created equal: “Workers in the bottom quintile of the wage distribution experienced a 35 percent employment decline while those in the top quintile experienced only a 9 percent decline.”
And it is not only about the economics: mortality rates from Covid-19 are also much higher in occupations such as road transport and social care than in the average population, the UK Office for National Statistics has found.
Policymakers have noticed the unequal suffering. In a speech to the Peterson Institute for International Economics on Wednesday, Federal Reserve chair Jay Powell noted that it was “more recent hires and lower-paid people who are bearing the brunt” of the crisis. “Among people who were working in February, almost 40 percent of those in households making less than $40,000 a year had lost a job in March,” he said. That is much worse than the aggregate labour force, which has lost 14 per cent of all jobs since the peak in February.
As I said at the start, all this is shocking but perhaps not surprising. What is surprising, at least to me, is to find out that this pandemic is not exceptional in exacerbating pre-existing inequalities. That is what pandemics usually do. Davide Furceri, Prakash Loungani and Jonathan Ostry at the IMF, with Pietro Pizzuto, studied a data set of pandemic episodes going back 60 years and found that, on average, a pandemic raises a country’s gini coefficient (a measure of inequality) by a sizeable 1.25 points on average within five years of the episode (see chart below).
Not only inequality, but jobs have followed the same pattern in this pandemic as in historical experience, which, worryingly, suggests that job losses for those with low education levels are large and persistent. Furceri, Loungani, Ostry and Pizzuto find a huge 5 percentage point drop in their employment-population ratio (see chart below). Those with advanced education, in contrast, suffer only smaller and temporary job losses.
It is typical, in other words, for pandemics to cause the most pain to those who are already worst off. This is all quite depressing. So what can be done? Some of the ideas I have written about in recent weeks — improving workers’ conditions, making debt restructuring easier and tax reform — would help. In an IMF blog post, Furceri, Loungani and Ostry call for “fundamental changes so that when future shocks inevitably occur . . . societies [can] protect the most vulnerable much better than they do today”. The historical experience they analyse also points to a specific remedy. The average rise in the gini coefficient after pandemics turns out to be very sensitive to whether post-pandemic economic growth is slow or fast (see chart below).
In a low-growth recovery phase, the gini goes up by 2 percentage points, and this drives the entire all-episode average effect of 1.25. In a high-growth recovery, inequality is unchanged.
If we then care about how unfairly the price of the pandemic is shared, we must pursue policies that secure strong growth. That means, among other things, a macroeconomic stance for a “high-pressure economy” — aggressively stimulative fiscal and monetary policy. How this can be secured in a world where public debt is already high and interest rates ultra-low will be our topic in next week’s Free Lunch.
In my FT column this week, I wrote about another way we can “rebuild better” after the Covid-19 economic collapse: by taking the opportunity for a root-and-branch tax reform.
LSE economists have estimated the significant cost in foregone educational achievement that should be expected from school closures. It is another example of the unequal burden of Covid-19: “Children from disadvantaged backgrounds are likely to be affected more than others by school closures, with fewer family resources and less access to online learning resources to offset lost instruction time.”
From the Spanish think-tank Esade Center for Economic Policy comes a proposal to rescue the tourism industry in a coronavirus-safe way: link up “green zones” in different EU countries to allow quarantine-free travel between them. For example, if an EU body declared both Bavaria and Mallorca safe regions, unimpeded travel between them could be allowed.
Alan Beattie explains why it is hard to diversify global supply chains.
The always-interesting Atul Gawande writes in the New Yorker that we can learn a thing or two from hospitals that have kept their staff safe from coronavirus about how to lift the lockdowns.
The British economy shrank by 5.8 per cent in March from the previous month, the steepest monthly fall on record.
Get alerts on Global Economy when a new story is published