Pandemic's long term harm: Income and employment gap will widen
The wealth gap didn't start in 2020, but the pandemic is making it worse, according to new data from Fitch Ratings.
Rising income inequality created a K-shaped economy prior to the pandemic, but uneven job losses and recovery threaten to exacerbate this gap, according to a report by Fitch Ratings.
Related: Financial fallout from pandemic exacerbates racial inequality: report
Income inequality between the highest and lowest earners started increasing in the early ’90s, authors Olu Sonola and Katie Falconi wrote, but accelerated between 2007 and 2019. After a decade of growth in the markets, the wealthiest Americans earned approximately 24% more than the lowest-income earners.
Sixty-eight percent of U.S. GDP comes from spending, Fitch found, much of that coming from high-wage sectors. Roughly 22% of employment in the U.S. is in those high-wage sectors, compared to 25% in low-wage sectors. However, wealthier sectors account for 50% of GDP, compared to 13% from low-wage sectors.
High-income sectors have fully recovered from the job losses of last year, according to the report, and middle-income sectors are just 7% below the January 2020 level. However, low-income sectors are still 24% the baseline.
Related: COVID-19 taking a heavier toll on low-income individuals in U.S. than other countries
“Protracted unemployment among lower income workers and a secular decline in many of the key industries that employ them will likely constrain wage gains over the medium term,” Sonola, an analyst at Fitch Ratings, wrote in the report. “This will inhibit consumption among poorer households and their participation in the economic recovery, increasing existing income inequality and potentially undermining social cohesion.”
High-income earners are more likely to have assets invested in the markets, especially equities, where 80% of ownership is among high-income earners.
“The significant divergence in wealth and income in the U.S. gives low-income households a reduced stake in the recovery, compounding the well-understood challenge that long-term unemployment leads to permanent wage losses,” according to the report.
Meanwhile, expenditure has been more evenly distributed, resulting in spending that surpasses income for lower income brackets, according to the report. In the bottom two income brackets, income after taxes represented 43% and 81% of average consumption.
“This implies that, on average, consumption by households in these income brackets relied on some combination of savings, investments and borrowings,” the authors wrote.
Stimulus and savings
Various stimulus and relief efforts, including unemployment and PPE loans, have resulted in about $800 billion more than what was lost in wages and income being transferred to U.S. households, the authors found. As a result of the American Rescue Plan Act, they estimate that number will likely reach $1.5 trillion.
Related: Latest stimulus bill includes health care premium relief
Stimulus rounds in April 2020 and December 2020 successfully bumped consumer expenditure across all income groups, but especially low-income households, Fitch found, citing consumer spending data from Opportunity Insights. However, “The risk remains that the scale of the recent stimulus packages cannot be repeated to support the economy in a prolonged jobless recovery environment.”
At the same time, household savings rates increased to about 21% by Jan. 31, Fitch found, well above the previous peak of 12% following the Great Recession. Some of that may come from stimulus payments, according to the report, but this is mostly a factor of so few opportunities to spend, with restaurants, travel and other discretionary services largely shut down by lockdown measures.
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