Inequality set to be greater than previous shocks

Unemployment around the world is increasing at an alarming rate and one only needs to look at the USA to see the impact of COVID-19 on the rate. Today the number of people claiming benefit is 35 million which equates to 14.7% of the labour force. This is contrast to 3.5% in February this year. More jobs were lost during March than the whole of the GFC in 2008-2009.

Globally it is estimated that 200 million jobs will be lost in 2020 with about 40% of the global workforce in jobs that face a high risk of becoming obsolete – International Labour Organisation. These job losses worldwide will mean mean increasing inequality as the lower income groups more likely to experience unemployment and financial insecurities and therefore more vulnerable to labour market fluctuations resulting from macroeconomic changes. In reality a lot of people on low incomes live from week to week and when their pay suddenly stops the situation becomes desperate. A lot of the jobs that lower incomes do (in the service sector) have now gone with the closure of bars, restaurants, offices etc. Some still work in essential services like hospitals but are now in the front line and exposed to the virus. Research has shown that pandemics lead to a persistent and significant increase in the net Gini Coefficient measure of inequality – see graph below). Government support in a lot of economies has not protected those that are most vulnerable and COVID-19 could end up being a catalyst to increasing inequality more than other previous pandemic episodes.

What is the Gini Coefficient? The Gini Coefficient is derived from the same information used to create a Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg.

Area between the Lorenz Curve and the 45° line
Total area below the 45° line

The resulting number ranges between:
0 = perfect equality where say, 1% of the population = 1% of income, and
1 = maximum inequality where all the income of the economy is acquired by a single recipient.

The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.

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