**6. Inequality in the early phase of economic recovery and long-term inequality impacts**

COVID-19 struck in a world where inequality was pervasive and socioeconomic mobility was not improving in most of the developing world since the 1960s-born generation (Narayan et al, 2018). As described above, the shock led to a widening of pre-existing gaps in capabilities and endowments in many countries, as well as a small increase in average income inequality within countries for 2020, as seen from the simulations conducted for 34 developing countries. The small within-country inequality impacts would have added to the increase in global inequality projected earlier (Figure 1), which were based on differences in GDP growth rates across countries due to the pandemic. The increase in income inequality also occurred because unlike advanced economies, most low- or middle-income countries could not ramp up social assistance to compensate the vulnerable for the income losses they suffered.

Moreover, the processes triggered by these impacts could have continued widening gaps between privileged and vulnerable groups even when economic activities are on the rebound. The limited evidence available from past epidemics suggests that events of this kind are associated with long-run increases in income inequality. Furceri et al. (2020) estimate the distributional impacts of five major events over the five years following each event and find that on average, the Gini coefficient of income in affected countries increased steadily.<sup>20</sup> The impact on inequality tends to be higher when the crisis leads to significant contraction in economic activity, as it happened on a large scale with COVID-19. This is also consistent with evidence from past _economic_ crises suggesting that larger shocks are associated with higher inequality over time. Economies with larger output and employment losses in the initial aftermath of the global financial crisis registered greater increases in income inequality compared with their pre-crisis average, as the employment rate of those with basic levels of education fell significantly in the medium term, while the employment rate of those with intermediate or higher levels of education was not affected (IMF 2018).

While the long-term impacts of COVID-19 on inequality cannot be known yet, waves of HFPS data can be used to identify patterns that provide clues about the trajectory of economic recovery. As economic activity starts to return where policies are becoming less stringent, an unequal recovery may foreshadow the risk of higher long-term inequality.

# 6.1. Channels of potential impact on long-term inequality and social mobility

It is useful to reflect on what past crises suggest about the channels of longer-term impact on inequality, so that the analysis of recovery can focus on these channels to assess long-term risks to inequality.<sup>21</sup> First, loss of jobs and business can leave lasting impacts on vulnerable workers. An unemployment spell for a new job market entrant can lead to lower lifetime earnings due to the lost time of (potential) experience, skills depreciation, and scarring effects. Compared with youth in well-off households, who can afford to postpone entry and use the time to get more education or experience through internships, youth from disadvantaged backgrounds may have little option but to enter the labor market even when it is in a depressed state. Higher rate of job losses among women can also have a persistent impact on women’s employment and wages.<sup>22</sup> Moreover, large-scale closures of small and micro enterprises can lead to erosion of entrepreneurial capital and jobs, which disproportionately affect the youth, low-skilled workers and those without access to capital.<sup>23</sup>

> 20 These epidemic or pandemic events are SARS (2003), H1N1 (2009), MERS (2012), Ebola (2014) and Zika (2016).

> 21 See Hill and Narayan (2020), Section 3 for a detailed review of the evidence.

> 22 See Narayan _et al_ . (2018), Chapter 6 for a discussion.

> 23 This is in addition to the efficiency costs imposed on society. See Didier _et al_ . (2020), who refer to ‘inefficient bankruptcies’.

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