Journal: Economic Inquiry
Synopsis: The traditional divide in the labour market has been between high and low skilled workers, and a large part of income inequality in any modern society has been riven by differences in the earnings between these two groups of workers. From time to time, new technologies have created major disruptions in the labour market, widening the pre-existing inequality between high and low skilled workers. Although unintentional and unanticipated, the technological change triggered by COVID-19 has caused another major disruption in the labour market, with an undesirable effect on the income inequality.
Like numerous countries, India went into a lockdown during the early days of the pandemic. In their paper, the researchers use data from India to document that income inequality between high-skilled and low-skilled workers increased sharply following the imposition of the lockdown. In order to study the economic and disease dynamics together during the pandemic, they integrate a benchmark economic framework with an epidemiological model (SIRD framework). The constructed model does a good job of capturing the disease dynamics and can explain between 24 and 59 percent of the increase in income inequality between high and low-skilled workers.
The intuition is as follows: the labour market divide that is relevant in a world where social distancing is the norm is whether the occupation of an individual allows him/her to work remotely/from home. And we document that the ability to work remotely is much higher in occupations typically performed by high-skilled individuals. Accordingly, as lockdowns and social distancing norms are enforced, it is the low skilled workers who experience a much bigger decline in their job prospects. Rising income inequality follows.
The researchers go on to show that direct transfers targeted towards low-skilled workers can help in reversing this increased inequality and also improve the effectiveness of lockdowns in slowing down the disease spread. This is because, economic transfers reduce the need of the people to go out of their homes to work and earn income, thus help breaking the chain of infection. Consequently, they argue in this paper, containment policies should be combined with targeted transfers for better economic and health outcomes.
Read more
