Income inequality will likely get worse due to the virus. This is what governments could do about it

Key Points

• The International Monetary Fund warned back in April that inequality was likely to rise during the pandemic.
• The institution expects the world economy to contract by 4.9% in 2020, with some nations in both developed and emerging worlds seeing gross domestic product fall above 10%.
• Most governments have embarked on large fiscal stimulus to deal with the crisis. However, there are concerns these measures are not broad enough to support the most vulnerable.

"I just took a massive hit, my money just went from making a really, really decent salary to basically zero."

Mo Boudreaux, a chef based in London, has been working in the restaurant business for over a decade, but the coronavirus pandemic has left him without a job.

The large catering events he worked for were put on hold, and all restaurants had to close their doors.

"The overriding sentiment is fear," Boudreaux told CNBC about his colleagues, who are anxious the industry will not fully reopen, which could in turn lead to additional layoffs.

Boudreaux trained as a chef and worked in different restaurants in London and Dubai before becoming self-employed a few years ago to work at private events. He is among those that are under significant pressure because of the economic crisis brought on by the virus.

Those who are self-employed are seen as vulnerable as they tend to receive less government support than other sections of the workforce. The U.K. government would also class a chef as being a low-skilled job, despite criticism, and would therefore be part of a group that is unlikely to be able to work from home.

As the situation deteriorates for these two groups of workers, international organizations expect income inequality — the gap between the wealthiest households and the poorest — to get worse in 2020 due to the crisis.

"The pandemic and these (containment) measures have affected the lower-skilled workers to a greater extent than higher-skilled workers, and essentially this is because lower skilled workers often don't have the option of teleworking or videoconferencing," Malhar Nabar, division chief at the IMF's research department, told CNBC.

"In that context we worry that the labor market outcomes, the employment prospects, the wage distribution that we see, all of that is going to be more skewed towards the high skilled workers," Nabar said.

In addition, he noted that in emerging markets and developing economies, the crisis has heavily impacted migrant workers too, "who often work far away from their support networks (and) who don't often have large pools of savings."

The International Monetary Fund warned back in April that inequality was likely to rise during the pandemic. Gita Gopinath, the Fund's chief economist, told CNBC at the time that "when you have a deep recession of this kind, there is always unfortunately tremendous loss of income for people at the lower end of the income scale."

The institution expects the world economy to contract by 4.9% in 2020, with some nations in both developed and emerging worlds seeing gross domestic product (GDP) drops above 10%.

Data available prior to the pandemic showed us that South Africa, Brazil, Zambia and Colombia were among the most unequal societies worldwide in terms of income. Meanwhile, between 1990 and 2015, Guinea-Bissau, Costa Rica, China and the United States actually saw income inequality getting worse.

If these (fiscal) measures are removed too soon, then some of the problems that they have been minimizing in the first phase will become much more evident.
Stefano Scarpetta
director at the OECD

There isn't yet any data available to show the full impact of the pandemic, but with unemployment levels going up and poverty rates increasing, the expectation is that the gap between the richest and the poorest will widen in many parts of the world.

The World Bank has already said that poverty rates are going up for the first time since 1998, due to the coronavirus crisis.

Under estimates made in June, it showed that Covid-19 could push 71 million people into extreme poverty. This means that these people will be living with or less than $1.90 per day. Under its worst-case scenario, Covid-19 and the associated lockdowns could send as much as 100 million into extreme poverty.  

What to do about it?

Most governments have embarked on large fiscal stimulus to deal with the crisis. However, there are concerns these measures are not broad enough to support the most vulnerable.

"Because I have been self-employed for at least three years, I haven't had any support from the government whatsoever," Boudreaux told CNBC.

In the U.K., the government has been criticized for not supporting self-employed workers as much as those in full-employment and for taking too long to come up with benefits for this group of workers.

Those who are self-employed in the U.K. have been able to apply for a three-month lump sum in July and a second and final payment will be available for application in August. However, the U.K. Treasury has signaled that, unlike those in full-time jobs, self-employed people are more likely to still be able to work.

According to the OECD (Organization for Economic Cooperation and Development), governments should not remove these benefits too quickly.

"If these measures are removed too soon, then some of the problems that they have been minimizing in the first phase will become much more evident. If they are kept for too long and for everyone then of course there would be much more disincentive for workers or companies to regain full activity," Stefano Scarpetta, director of employment, labour and social affairs at the OECD, told CNBC.

In addition, Scarpetta believes that as economies relax some of their health measures, they need to support the most-impacted sectors, such as restaurants and tourism. Within the various sectors, governments also need to identify the most vulnerable groups, which "is not easy," he said.

This is particularly the case in countries with weak infrastructure. As a result, the IMF suggested that governments develop the necessary networks to reach their population.

"In some countries you already have well existing infrastructure through well-established taxpayer ID registries through most people having bank accounts so relief can be distributed through those channels. But there are other economies where a lot of people may not have a formal presence on the tax registry, they don't have these IDs, they don't have bank accounts and that's a big challenge," Nabar from the IMF, said.

Finally, governments will also need to retrain workers, so they are more easily employable by surviving and new businesses.

It "will be important to have in place retraining and reskilling programs to facilitate workers' acquisition on new skills so they can get employment in different sectors," Nabar said.