A healthy economy can reduce inequality – but only to a limited extent

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A pedestrian wearing a face mask delivers food to a homeless person sleeping in the entrance of a shop, closed due to coronavirus restrictions, in central London on December 23, 2020.

Tolga Akmen | AFP | Getty Images

“A return, not so much to economic growth, but to a healthy economic situation overall will help alleviate the inequalities that have widened sharply this (past) year,” Wilcox, a senior fellow at PIIE, told CNBC.

“Once a vaccine has been widely administered, people will feel comfortable once again engaging in lots of activities that powered the service economy pre-pandemic,” he said. That includes going to the gym, eating in restaurants, flying on planes and attending conferences.

“All that will help reemploy a lot of the people who have been out of work since mid-March,” he said.

More jobs is clearly something that can help inequality in the short term. But, before Covid many economies had quite (even very) low unemployment and yet inequality was already a problem.

But Richard Yetsenga, chief economist of ANZ Bank, said economic growth may not be able to alleviate inequality beyond gains made through job creation.

“More jobs is clearly something that can help inequality in the short term. But, before Covid many economies had quite (even very) low unemployment and yet inequality was already a problem,” he said in an email.

“Economic growth didn’t solve the equity problem in most economies in the decade before Covid, and so something would need to be different to resolve it afterwards,” he added.

In a research note from November, Yetsenga said giant corporations have been the main beneficiaries of global growth over the past two decades. “But median wages have not increased the way we might have expected, and certainly not in a way that was consistent with historical experience,” he wrote.

Additionally, it is possible that, given the accelerated rate of digital adoption, inequality could worsen as economies progress.

“The industrial revolution made us much wealthier, but inequality widened dramatically,” Yetsenga said. “There are strong similarities with the digital revolution.”

IMF researchers found that new technologies such as artificial intelligence and robotics could replace labor from developing countries and widen the gap between rich and poor countries.

Possible solutions

Yetsenga said inequality may be the “biggest policy challenge” after Covid, and accepting that it is a problem will be the first step to finding an answer.

The next step is seeing growth and inequality as intertwined, instead of one being the solution to the other.

He said aiming for greater GDP growth may appeal to some as the best way to solve inequality, but that approach is not likely to succeed. “Surely we can’t keep striving for one (growth) and keep expecting the other (inequality) to magically resolve itself?”

Is rising inequality an inevitable consequence of today’s technology-driven economic transformations—and globalization? The answer is no.

Zia Qureshi

Brookings Institution



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