Worse for some

The pan in pandemic is a dangerous prefix. While the virus now straddles the globe, those three letters can give the impression of an equality of impact that is very far from the truth.

On the health side this is blindingly obvious, with death rates from the virus climbing sharply with age and, as in previous epidemics over the centuries, households in poorer areas seeing higher infection rates.

But the economic effects are also far from uniform. They reflect nature of a virus that spreads through face to face contact, the make-up of our service heavy economy, the reality of who does what job and the huge role of policy in softening, but far from eliminating, the blow of this economic catastrophe.

Eight months in, as our expectations finally catch-up with the reality that the pandemic is here to stay, we should be taking stock of where that complex web of drivers has left us, and what it tells us about who will bear the economic pain in the months to come.

People often simply say this crisis is making inequality worse or that it is. But the reality is far more complex, nuanced, and in some respects under our control than that.

The nature of the initial phase of this crisis was a huge labour market shock as we shut down, and then slowly reopened, swathes of our economy to control the virus. The main drivers of how that shift affected you were your age and your earnings, with gender

More than half of under-25s had been furloughed or lost their jobs by June, compared to less than a third for almost all other ages groups. It’s no surprise that the number of18-29-year-olds reporting higher-than-normal levels of mental health problems us running at over 50 per cent above pre-pandemic levels. The economic shock is causing one health shock even as it helps us contain another.

Low earners also stand in the eye of the economic storm. They have born the biggest health risks while higher earners were able to work from home, and are three times as likely to have been furloughed as high earners and four times as likely to have lost their jobs in the first phase of the crisis.

It’s the uniquely sectoral nature of this crisis driving the burden onto the low paid and young. Social distancing is death to the sectors they work in (hospitality, leisure and retail) but an inconvenience to the likes of accountancy or IT. 77 per cent of hospitality workers were furloughed at some point – 10 times the rate in finance.

But understanding that the lowest earners have been hardest hit is only the start for understanding the impact of the crisis. Indeed the hit to family incomes has been much more equally shared across low, middle and higher income families than the job losses have been amongst low, middle and higher earners.

Why? Two reasons stand out. First, lower income households have fewer workers in them. With half of the adults in the bottom fifth not working before the crisis, their incomes are less exposed to what is fundamentally a big shock to labour market income than the rest of the population. Another way to think about this point is that many low earners who have been hard hit by this crisis are in middle or high income families, often because their partner earns significantly more than them.

Second, policy makes a huge difference to how shocks to labour market income translate into hits to family incomes. The Job Retention, or furlough, Scheme is the most high profile government intervention, ensuring that people unable to work receive 80 per cent of their previous salaries up until the end of this month. At the schemes peak 8.9 million employees were furloughed, so that while lower earners jobs were most affected their incomes were protected.

For lower income families even more important was Rishi Sunak’s £9 billion boost to social security that kicked in alongside the lockdown. This increase in income from the state at the same time as the decrease in income from the labour market, meant that incomes of the poorest fifth were close to being unchanged in the first phase of this crisis. Without this policy action they would have fallen a full 8 per cent.

So if we follow the normal focus of economists on household incomes we would conclude that the crisis so far has been fairly evenly felt. But that would be the wrong conclusion. With rich and poor all seeing their incomes fall, it is true that inequality hasn’t surged. But family budgets, and financial strain, are about far more than what income is coming in. What is going out spending wise, and where you are starting from, are crucial too.

One way to understand the economics of this crisis is that the rich stopped spending on non-essentials and lower earners stopped working. These are two sides of the same coin because it is overwhelmingly higher income families spending their money on the hospitality and leisure businesses employing those lower earners.

So while higher income families have seen income falls, they are also twice as likely to have seen their spending fall by over 10 per cent in the initial phase of this crisis than the poorest households. The result is that their family budgets have come under far less pressure than poorer household. The latter do not have lots of non-essential consumption to cut back when facing an income shock, so it’s not surprising that a third of the lowest income families have seen their ability to manage financially deteriorate. In stark contrast higher income families are as likely to have seen that ability improve as worsen.

Our aggregate savings ratio hit 29 per cent in the second quarter of 2020 on the back of huge savings by higher income families. Working from home isn’t just seeing them save time, they are in many cases saving thousands on the season ticket. They can’t jet around the world on expensive holidays, and if they do they end up saving because they can’t eat out when quarantined on their return.

So inequality as we normally measure it isn’t surging, but financial pressure is falling hardest on lower income households. When considering their ability to manage that pressure, remember: history matters. Coping with tough times if you’ve had a good few years is much easier than after lean times.

The last few years have been particularly bad ones for low-income households, whose typical income actually fell between 2016-17 to 2018-19. To put that in longer term context it meant that their incomes were no higher in 2018-19 than in 2001-02. This living standards disaster hasn’t been driven by Covid-19 (high inflation post-referendum and the roll-out of cuts to benefits are where blame lies) but it is the backdrop that determines how the virus’ impact is felt.

So the first phase of this crisis has been bad for low earners, and seen lower income families much less able to cope with painfully widespread falls in income. But crises ebb and they flow, they come and go in phases. But what does the future hold for low and middle income families?

Two features will shape that more than any others: the mounting up of job losses and the stripping back of government support. As we have unfrozen our economy in recent months that has brought the important benefit of a return to economic activity, but it has also revealed the damage that has been done. Employers that kept people on via furlough are letting them go as they confront the brave new world. Last week we learnt that the UK experienced the largest rise in unemployment in over a decade. The degree of economic pain to come will be far higher than many hoped over the summer as the virus has shown that it is very much still with us. With forecasts for overall unemployment to double or triple from it’s pre-pandemic levels, we are heading for somewhere between 11 and 17 per cent of 18-29-year-olds being unemployed later this year. That amounts to between 800,000 and 1.3 million people.

The industries hardest in the months ahead will look very similar to those low earner dominated sectors hardest hits so far, but within them the relative impact is shifting over time. While retail was in the eye of the storm early on, it is now benefitting from shifts in spending away from services towards goods. Overall retail spending is now back above pre-crisis levels as we buy patio heaters to socialise in sub-zero temperatures in our gardens rather than in pubs and restaurants.

In contrast hospitality and leisure jobs are now most at risk. Those are the sectors that have struggled to bring workers back from furlough, and those directly affected by the ramping back up of social distancing restrictions now. In September, 3 in 10 workers in both these sectors were still on furlough, despite the scheme ending at the end of October. Many of these jobs will be lost.

The geography of this crisis is also changing. The early phase was incredibly widely spread as we closed down shops and pubs everywhere, but as we enter this new phase it is slowly over time becoming more concentrated in two areas: cities and those areas with high virus prevalence. This is because as we unfreeze the economy areas that people have traditionally needed to travel to in order to spend money are seeing the least business return – as now epitomised by the decline of city centre Pret branches. And with the months ahead likely to see local lockdowns tied to the levels of infections, we might also expect to see greater economic pain in London, the north and midlands outstripping that in the south east and south west.

So while the young and low earners will remain most affected by this crisis in the months ahead, the nature of that impact will switch from furloughing to outright unemployment. This in turn will imply much bigger falls in income, with those losing work and relying on Universal Credit receiving about half the level of income support as they would have done on furlough.

And policy is now at risk of turning from being part of the answer to these income hits, to being part of the problem. The Chancellor’s replacement for the furlough scheme – the Job Support Scheme – will not provide the degree of support needed in the next phase of this crisis. While the criticism of it from Labour city mayors has focused on the reduction in support from 80 to 66 per cent of previous wages, the real problem is that far too few people will qualify for the support it provides at all.

It will only support those working for businesses that are closed if they have been legally required to do so. So while pubs in areas with the highest level of local lockdown will be protected, restaurants that are simply unable to open with so little business will not be covered. And where a firm is open but struggling with low levels of demand, the scheme provides little incentive for the employer to choose to cut the hours rather than jobs. In fact it would cost a third more to employ two workers on half time hours rather than one full-time

And where increases to social security prevented lower income families being worst affected by the first phase of this crisis, cuts to benefits planned for next April risk their incomes being by far the worst hit in the next phase. The decision to reverse the increase in Universal Credit implemented at the start of this crisis will see 6 million households (containing 12 million adults and 6 million children) having their income reduced by £1,000 from April 2021. This would see the level of unemployment support fall to its lowest real-terms level since 1990-91, with the bottom fifth of families losing an almost unimaginable 7 per cent of their disposable incomes. The very areas being hardest hit by local lockdowns now would also be hardest hit with households being 50 per cent more likely to lose out in the Red Wall regions of the North, than in the South East

The first phase of this crisis also teaches us that the path households finances have been on crucially shapes their resilience to this crisis. While higher income families have strengthened their balance sheets in the first phase of this crisis, and can now draw down on those extra savings in the hard times to come, lower income households have taken on more debt and cannot repeat that exercise as the pandemic drags on. No-one should be relaxed about predictions from the Trussell Trust that this winter could see a 61% rise in need for food banks compared to the same period last year.

While we are probably pas the peak of the hit to GDP of this crisis, the grim news is that we are probably a long way from rock bottom when it comes to the impact on living standards of this pandemic. Where that rock bottom is will be very different for different groups. Low earners and the young are the individuals overwhelmingly hardest hit. And while lower income Britain has been protected to date by a huge policy response, the mismatch between the ramping back up of the virus caseload and the ramping back down of government support now risks a toxic combination of unemployment and benefits cuts for the poorest in our society. No-one can make this pandemic go away, but we do have the levers to share the pain it brings. Whether we come out of this crisis as a more united or divided country will depend in large part on whether we choose to pull them.

A version of this article originally appeared on Tortoise Media