showCASE 106: The Adverse Impact of COVID-19 Pandemic on Inequality Levels in the EU and What Can Be Done to Mitigate It
In this issue of showCASE, our Senior Economist Mehmet Burak Turgute valuates the impact of the COVID-19 crisis on income inequality levels in the EU and Poland. While the estimation results suggest that the aggravated effects of the COVID-19 can bedramatic in the EU, the effective fiscal response and redistribution strategies are crucial to mitigate the negative impulse.
Written by Mehmet Burak Turgut
The income inequality, defined as a disparity of income distribution in which a small percentage of a population earns a larger percentage of income, has risen throughout the world in recent decades. The empirical evidence increasingly suggests that income inequality can hamper economic growth, decrease labour market prospects, and cause social unrest. These recent trends and evidence put income inequality in the policy frontier. For example, reducing inequality within and between countries is one of the Sustainable Development Goals of the United Nations. Similarly, the European Social Pillar proclaimed in 2017 contains twenty key principles such as equal opportunities and access to the labour market and fair working conditions for equal society and equal distribution of income.
Unfortunately, the unprecedented impact of the COVID-19 pandemic on the world economies is expected to deepen the income inequality. The containment measures introduced by the governments to limit the spread of the virus disrupted economic activity and left millions of workers and self-employed vulnerable to the layoffs and income losses in the hardest-hit sectors. ILO estimates the global workforce loss to be around 200 million workers and the majority of the loss to happen in retail trade, accommodation and food services, as well as manufacturing sectors. Moreover, the risk of losing a job and income is higher for the low-skilled and informal workers. Indeed, the Initiative on Global Markets panel shows that almost three-fourth of the respondents expect the COVID-19 crisis will worsen the income inequality, and the low-income workers will suffer a relatively bigger hit to their incomes.
The governments announced huge fiscal packages mostly in the form of liquidity provisions for businesses to stay afloat, income supports to households, and subsidies to preserve jobs and deal with the COVID-19 crisis. The IMF estimates that these supports amounted to about USD 9 trillion in April 2020. In addition to their stabilisation effects, these policies can help to avoid the unequal impacts of the crisis if they target the most vulnerable groups such as low-income households.