Growing Income Polarization After COVID-19: "The Rich Save, While the Poor Increase Debt"

Oxford Economics 'Pandemic-Driven Inequality Outcomes'
High-Income Office Workers Maintain Employment, Low-Income Production Workers Face Unemployment Risk
Wealth of the Rich Accumulates Amid Stock Market Boom

[Asia Economy Reporter Jeong Hyunjin] Concerns are growing that income inequality, which had already widened due to the COVID-19 pandemic, will deepen further. As the real economy remains sluggish and unemployment rates stay high, the prolonged COVID-19 crisis has led to wealth concentrating among relatively affluent asset holders.

According to a recent report titled "Pandemic-Driven Inequality Outcomes" released by Oxford Economics on the 19th (local time), when dividing U.S. consumers into three groups based on income, the credit and debit card spending of high-income consumers dropped by nearly 40% from January to April. This decline was about 10 percentage points larger than the roughly 30% decrease seen among low-income groups. The greater drop among high-income groups was due to reduced discretionary spending on travel and dining out caused by social distancing measures. Although overall consumption recovered after economic activities resumed, the consumption decline compared to January last month was reduced to 2% for low-income groups, while high-income groups still showed an 11% gap, indicating a slower recovery.

John Payne, an economist at Oxford Economics, explained, "For low-income groups, if income decreases, they can either reduce consumption accordingly or maintain consumption but increase debt." He suggested that since most of their consumption is for necessities, they are more likely to choose the latter. This means low-income groups cannot immediately reduce purchases of essential goods and may resort to borrowing to make purchases. Consequently, high-income groups with surplus funds tend to increase savings to prepare for future uncertainties, while low-income groups with reduced income must borrow, increasing their debt burden.

The problem is that during the COVID-19 situation, maintaining existing jobs was limited to office workers with higher income levels who could work remotely. According to a survey conducted in June in China targeting over 5,000 households, households earning more than 300,000 yuan annually (approximately 51.48 million KRW) saw income increase in the second quarter compared to the same period last year, while others experienced declines, with households earning less than 50,000 yuan reporting the largest decrease. In the U.S., the unemployment rate in July averaged 10.2%, but was lower among Whites at 9.2%, while Blacks (14.6%), Asians (12%), and Hispanics (12.9%) exceeded the average.

This situation has effectively poured fuel on income inequality that had been worsening even before COVID-19. According to a recent report by the Brookings Institution, the income growth rate of the middle class dropped from 27% during 1967?1981 to 8% during 2002?2016. Among the middle class, the proportion of higher-income middle-class individuals increased, while the proportion of the true middle class decreased.

The recent stock market boom, which reached record highs, has also contributed to worsening income inequality. When the stock market is booming, the assets of the top income groups increase. Edward Wolff, a professor at New York University and researcher at the U.S. National Bureau of Economic Research (NBER), who has studied income inequality, noted, "The middle class tends to invest mainly in housing, while the wealthy invest in stocks and businesses," adding, "The returns on businesses and stocks are higher than those on housing." According to data from the U.S. Federal Reserve (Fed), in 2016, 84% of U.S. stocks were held by the top 10% of income households.

Billionaires such as Jeff Bezos, CEO of Amazon; Bill Gates of Microsoft; and Mark Zuckerberg, CEO of Facebook, have increased their wealth thanks to rising stock prices. Additionally, an analysis by the Economic Policy Institute (EPI), a U.S. think tank, showed that in the past year, CEOs of the top 350 U.S. companies earned 320 times more than average workers, widening the gap from 61 to 1 in 1989. Considering that CEOs’ income is heavily weighted toward stock options rather than salaries, the stock market’s strength inevitably increases the value of stocks held by the wealthy, thereby expanding the gap in financial income.

Howard Gold, a columnist for MarketWatch, evaluated that the Fed’s monetary policies, such as interest rate cuts and corporate bond purchases, have dramatically increased inequality and benefited the wealthy. Although Fed Chair Jerome Powell stated in May that monetary policy has not expanded inequality, he pointed out that liquidity expansion to prevent household and corporate collapse and economic recession is causing side effects.

The International Monetary Fund (IMF) analyzed in May that inequality indices such as the Gini coefficient tend to rise after experiencing pandemics. Analyzing the economic impact of five pandemics since 2000?including Severe Acute Respiratory Syndrome (SARS), H1N1 influenza, and Ebola?across 175 countries, the IMF found that the Gini coefficient increased by 1.5% over five years following outbreaks, and jobs for workers with lower education levels decreased by more than 5%.

This content was produced with the assistance of AI translation services.