Longstanding economic fractures have been widened by the pandemic. In response, a range of policy actions are needed across the income distribution and at all stages of the economic process.
Economic and social inequalities take many forms: many have been widened by Covid-19. Across the income distribution, consumption, savings, job losses and the opportunities for remote work have evolved very differently. Across genders and between parents and those without children, the toll of school closures, lack of childcare and additional housework has been uneven. And across regions, sectors and occupations, the pandemic has brought vastly different burdens.
These challenges are daunting and need to be tackled at a variety of levels. Rather than thinking about policies in isolation—education or work or redistribution from higher to lower incomes—policies should be considered jointly. Redistribution is key but it needs to be combined with appropriate ‘pre-redistribution’—interventions to improve economic opportunities.
Such packages of policies are important not only for reducing inequality, but also for improving productivity. Without more equal access and opportunities, technologies and resources remain bottled up in a few companies and among a few ‘elite’ groups of employees, mainly in urban metropolitan areas, and do not trickle down to others. Workers left using old technology or limited by resource availability see their output hampered. Many are left behind.
A useful way to think of potential policy interventions is with a three-by-three matrix. On one side are the income groups mainly targeted by a policy: the bottom of the income distribution, the middle classes, and the very top.
On the other side are the three stages at which interventions can take place: pre-production policies, which shape the endowments that people bring to the labour market, and their opportunities; production policies, which influence firms’ decisions and how the labour market functions; and post-production policies, which are redistributive measures, such as government transfers and progressive taxation.
Many traditional welfare states in Europe rely heavily on the first and third columns of the matrix: on the one hand, fostering education and training to prepare people for the world of work; and on the other, progressive taxes and transfers, as well as social insurance against unemployment, illness or disability.
Table 1: Policy matrix, economic stage of policy intervention and income segment
|Primary education & early-childhood programmes; vocational training
|Minimum wage; apprenticeships; reduced social security contributions by firms; in-work benefits
|Social transfers (housing, family child benefits); guaranteed minimum income
|Public higher education; adult retraining programmes
|Cluster policies; SME support programmes; EU Structural and Investment Funds; occupational licensing; on-the-job training; collective bargaining & work councils; EU trade policies
|Unemployment insurance; pensions
|Inheritance & estate taxes
|R&D tax credits; EU competition policies
|Top income tax rates; wealth taxes
Production stage policies are not systematically geared towards reducing inequality and creating better jobs. There are some exceptions—the minimum wage, collective bargaining regulations and labour protection —but in general this stage targets market competition, physical investment and innovation, reflecting a traditional divide between ‘social policies’ that focus on inequality and economic policies to improve productivity.
But such traditional welfare systems are built on the assumption that (almost) everyone who wants a good job can find one. The pandemic has revealed the stark inequalities in the quality of jobs accessible to different groups.
It is not possible to define what a ‘good job’ is in the absolute, as it depends on local circumstances and people’s preferences (for example, for flexibility). Nevertheless, some clear criteria include safe and reasonable work conditions, sufficient pay that enables good living standards and access to benefits such as healthcare, childcare and pensions in the future, as well as adequate social insurance and some share of career opportunities and progress. These kinds of jobs have been disappearing.
In a world in which good jobs are becoming scarce due to longer-run trends such as technological change and globalisation—and where shocks such as Covid-19 deepen the cleavages—there is a need to act on all three columns in a coordinated and comprehensive way.
Where can I find out more?
- A policy matrix for inclusive prosperity: National Bureau Of Economic Research working paper by Stefanie Stantcheva and Dani Rodrik
- Living standards, poverty and inequality in the UK: 2021: Report from the Institute for Fiscal Studies
Who are experts on this question?
- Stefanie Stantcheva, Harvard University
- Dani Rodrik, Harvard University
- Olivier Blanchard, Peterson Institute for International Economics