Opinion The pandemic’s income inequality surprise
Anup Malani, Arpit Gupta, Bartek Woda write: As social mobility rose, income inequality fell below pre-pandemic level.
During the lockdown, poverty and inequality spiked as economic activity grounded (almost) to a halt. India’s population has been ravaged by the Covid-19 pandemic. As per official statistics, millions have been infected, while around half a million have died. But the indirect evidence suggests a far larger impact, with over 65 per cent of the population having been infected, with perhaps five million excess deaths.
While the country’s health has suffered greatly, economic data paints a more complex story. India’s economic experience has two parts — during the national lockdown and after it. At a macro level, it is well known that GDP fell sharply during the lockdown. After the lockdown, there has been a largely V-shaped recovery, even though the main waves of the pandemic occurred well after India’s lockdown.
But what happened at the micro-level? How did the very poor fare? Did inequality rise? We used monthly data of roughly 2,00,000 households with one million members from the Consumer Pyramids Household Survey (CPHS) to examine these questions. The answers are somewhat surprising.
During the lockdown, poverty and inequality spiked as economic activity grounded (almost) to a halt. The fraction of the population in extreme poverty, defined by the World Bank as those with income below $1.90, rose from 7.6 per cent in November 2019 to 50.5 per cent in April 2020. While both the rich and the poor suffered, the poor were hit harder. In 2019, the average monthly household income of the top and bottom quartiles of the income distribution were approximately Rs 45,000 and Rs 8,000 in urban areas respectively and Rs 22,500 and Rs 7,500 in rural areas. During the lockdown, in urban areas, incomes of the top quartile fell by roughly 35 per cent and the bottom quartile by 55 per cent. The rural numbers were 35 per cent and 40 per cent respectively. Overall, income inequality, measured by the ratio of the average income in the top quartile and in the bottom quartile, spiked by almost 25 per cent and 15 per cent in urban and rural areas respectively.
After the lockdown, poverty began to decline but did not return to the pre-pandemic levels. As of July 2021, 11.7 per cent of households remained in extreme poverty, about 4 percentage points higher than before Covid-19.
The surprising finding, however, is that income inequality declined after the lockdown to below pre-pandemic levels. Pre-pandemic, the top quartile earned on average four times that of the bottom quartile in urban areas, and three times in rural areas. Now, it earns three times more in urban areas, and twice in rural areas. Even more remarkably, the higher the income was at nearly every point in the income distribution, the economic harm from the pandemic has been worse: The 95th percentile households were hurt more than the 90th percentile, and the 10th percentile more than the 5th percentile.
This decline in inequality was driven largely by an increase in social mobility. The change in a person’s income has two parts: The change in her income percentile and the change in income for that percentile. The first change is called social mobility, while the second change is related to the Gini coefficient which measures the fraction of income attributable to different percentiles of the income distribution. India had a relatively high Gini coefficient of 0.4 before the pandemic. Unfortunately, it returned to that level after the lockdown. However, the probability that a household fell from the top or rose from the bottom quartile jumped by roughly 10 percentage points.
No data is perfect, and the CPHS — the data we employ — is no exception. For example, the response rates in CPHS fell sharply during the lockdown. Our analysis suggests, however, that the non-response was almost random, so CPHS remained representative. More importantly, CPHS is still the “best game in town” for understanding the pandemic. Government microdata will not be available for some years.
Some economists have questioned whether the CPHS adequately represents poor communities. In our opinion, the jury is still out. But, even if CPHS is not fully representative of the very poor in rural areas, that would not alter our conclusions. Our evidence shows that the negative effects of the pandemic fell with each lower percentile, even below the 10th percentile. If CPHS sampled those percentiles more, we would find that inequality fell even more than what we suggest above.
One might object that our analysis does not pass the eyeball test. Urban residents, especially in the top 1 per cent, might argue that the ultra-rich saw their stock portfolios grow even as they worked safely from home. We do not disagree. Almost no data, including the CPHS, captures the top 0.1 or even the top 1 per cent of income in cities. These individuals do not respond to such surveys. Yet the top 0.1 per cent are not the only measure of inequality. The top 0.1 per cent may be quite visible to the top 1 per cent, but they are still only 0.1 per cent of the population. The 75th percentile is far more visible to the 25th percentile than is the top 0.1 per cent.
It is important to clarify what our analysis does not show. First, it does not dispute that there is substantial inequality in India. As of July 2021, the top quartile average household income was still Rs 15,000-20,000/month greater than the bottom quartile. Second, we do not show what will happen when the pandemic ends. While there were some signs that inequality was falling before the pandemic, we cannot be sure that the pattern will return after the pandemic.
Most importantly, while one might view the reduction in inequality as a positive, we would not call it a silver lining. The pandemic was overwhelmingly a disaster for the country. But our findings suggest that it could have been worse — inequality could also have spiked. Fortunately, after the lockdown was lifted, it did not.
If there is a deeper lesson, it is that there is no clear pattern between growth or poverty on the one hand, and inequality on the other. Personally, we believe that policies should focus on growth and poverty. While inequality is problematic, it is a more elusive target.
This column first appeared in the print edition on March 22, 2022 under the title ‘The pandemic puzzle’. Malani is the Lee and Brena Freeman Professor at the University of Chicago. Gupta is Assistant Professor at NYU Stern School of Business. Woda is a research specialist at University of Chicago
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