Inequality Consequences of the COVID-19 Recession

Abstract

The COVID-19 pandemic and the resulting lockdown policies have disproportionately affected workers at the bottom of the income distribution, thus widening the earnings gap between the top and the bottom percentiles of workers. In this paper, we examine how changes in the labor market due to the COVID-19 recession affect earnings inequality in the US and contrast the effect of COVID-19 recession with previous recessions identified since 1988. Using monthly earnings data from the Current Population Survey, we find a precipitous increase in inequality as measured by the 10/90 ratio of earnings in April 2020. The increase in earnings inequality can be attributed to the widening of the gap in earnings in the bottom of the earnings distribution. Compared to the Great Recession, that saw a comparable increase in earnings inequality, the underlying causes of changes in inequality differ significantly. Most job losses in the COVID-19 recession are concentrated among low earning industries in the services sector, while job losses during the Great Recession were more uniformly distributed across the earnings distribution. The results of the present study provide key guidelines for the design of redistribution policies in the post pandemic recovery.