Economic context
Research Summary

Amid a Collapsing Labor Market, Pandemic Policy Response Reduced Poverty and Inequality

Andrew BoardmanMay 17, 2023
Source: US Bureau of Labor Statistics Working Papers  Title: The Impact of COVID-19 on Labor Markets and Inequality  Author(s): Joe Piacentini, Harley Frazis, Peter B. Meyer, Michael Schultz, and Leo Sveikauskas  Original Publication Date: August 2022 Read Full Research Article

At the onset of the COVID-19 crisis, many expected the pandemic to devastate the economic standing of lower- and middle-income households and to supercharge preexisting trends of widening inequality in the United States. But evidence gathered over the last two-and-a-half years indicates a different story: even in the wake of unprecedented labor market dislocations, the robust policy response and historically swift employment recovery of 2020 and 2021 limited economic losses and bolstered household finances, resulting in lowered poverty and narrowed inequality even compared with prepandemic levels. However, research suggests that emerging economic and policy challenges risk derailing these developments.

An August working paper from economists at the Bureau of Labor Statistics gathers this growing body of evidence, reviewing what is known—and what is not yet fully understood—on the effects of the pandemic and recovery on inequality in the immediate, near term, and long run. The authors survey results across 134 research studies examining aspects of economic inequality in the United States amid the pandemic, in the decades leading up to it, and expectations for its longer-term ramifications. A pattern of consistent findings emerges, with implications for policymakers, researchers, and practitioners. 

Key findings  

  • Unprecedented labor market fallout: From February to April 2020, employment plummeted a staggering 15 percent. Job losses were widespread but most severe for workers in face-to-face service-sector jobs, who tended to have lower incomes and were less likely to have college degrees. The pandemic laid bare preexisting disparities in the labor market, with employment interruptions disproportionately falling on the backs of Black and Hispanic workers and women, research shows. Some projections made early in the pandemic, based on evidence quantifying consequences of past recessions, anticipated swelling financial distress, a years-long increase in long-term unemployment, persistently lower earnings for those affected by job losses, and an acceleration in trends of widening economic inequality and eroding opportunity for lower- and middle-income workers. 
  • Women especially impacted: Several studies indicate that women, who made up a larger share of employment in the hardest-hit sectors and who shouldered an unequal weight of the caregiving responsibilities induced by school and child care closures, experienced larger blows to their employment and labor force participation. The impact was particularly stark for women without college degrees and Black and Hispanic women. These effects stand in contrast with most past economic downturns, where men tended to suffer greater job loss. 
  • Policy response and protection of incomes: Robust relief programs called into action in response to the pandemic’s economic fallout—including expanded unemployment insurance, economic impact payments, the Paycheck Protection Program, increased food assistance, housing support, the enhanced child tax credit, and aid to local governments—were largely successful in shielding household finances and supporting business recovery, studies find. In the month of April 2020, for example, federal unemployment insurance and economic impact payments held 18 million people out of poverty. Relief was broad-reaching, but program delays and gaps cased acute hardship for some, with insufficiencies impacting a larger share of Black and immigrant households relative to white and nonimmigrant ones. 
  • Improvement of poverty and inequality despite job losses: Beyond forestalling worst-case scenarios and expectations, aid programs strengthened the financial footing of many households even relative to before the pandemic, data show. Rather than surge, poverty in 2020 declined by a substantial 2.6 percentage points from its 2019 level. Income inequality as measured by the Gini index decreased 4.2 percent from 2019 to 2020, a magnitude that is not statistically significant. Importantly, this indicator excludes benefits received through economic impact payments and expanded tax credits such as the child tax credit and the earned income tax credit, suggesting a greater narrowing of inequality once these income sources are incorporated. Data for poverty and inequality in 2021 and 2022 were not yet available when this working paper was published.  
  • A comparatively strong recovery in jobs and pay: After historic job losses in early 2020, workers regained jobs at a faster pace than in past recession recoveries. The unemployment rate spiked to 14.7 percent—the highest on record—in April 2020. Two years later it had declined to 3.6 percent, nearly matching its prepandemic level. In the Great Recession and its aftermath, joblessness peaked at 10 percent and took more than eight years to reach 3.6 percent. Many disparities in employment heightened by pandemic dislocations—such as disproportionate job losses experienced by women, workers without college degrees, and workers of color—had largely dissipated by the end of 2020, one study indicates. Recovery in labor force participation was more gradual. Rebounding labor demand shored up workers’ bargaining position, resulting in rising pay, particularly for people working in many traditionally lower-wage sectors. 
  • Challenges on the horizon: Research highlighted in the paper points to a series of emerging trends and challenges induced by the pandemic that could have significant effects on economic mobility and inequality in the near term and long run. The economic and policy conditions that combined to alleviate disparities in 2020 and 2021—robust relief and a rebounding labor market—are at risk of unraveling as support programs expire and as households and policymakers contend with elevated inflation and an uncertain economic outlook. Some trends that may have been accelerated by the pandemic—such as a jolt in employer behavior toward greater adoption of workplace automation technologies or an increase in telework causing a shift in economic activity away from city centers—could have uneven effects for workers in lower-wage sectors over the longer run, though evidence on the extent and full effect of these changes is not yet certain. Pandemic-induced student learning losses may have long-lasting negative impacts on earnings, particularly among students from less-advantaged backgrounds.  

Policy and practice implications

Based on this study’s findings, WorkRise identifies the following implications for policy and practice.

  • Research shows the robust policy response to COVID-19 protected incomes and improved the resiliency of workers, families, and the broader economy. Going further, the policy response—combined with a comparatively quick labor market recovery—enabled reductions in poverty and inequality even beyond their 2019 levels, beginning to turn the tide on decades of rising inequality and persistent household financial fragility.
  • There is substantial risk of gains for lower-income workers and families being undone, particularly as relief programs expire and prospects for continued labor market strength grow uncertain.
  • Policymakers can implement lessons from the pandemic economic response by considering measures to bolster economic security and address underlying inequities, which could include permanent improvements to unemployment insurance, sick and caregiving leave, and family income supports; by pursuing a sustainably strong labor market alongside stable consumer prices; and by adopting policies and plans to ensure an adequate response to future economic downturns.
  • Policymakers should be mindful of evidence on potential emerging challenges to lower-income workers and families brought on by the pandemic, such as telework-driven geographic shifts in economic activity, growth in workplace automation, and persistent student learning losses, and should respond appropriately.
  • Research suggests programs enacted to support workers and families boosted resiliency economy-wide, enabling a historically strong and full recovery that conferred benefits to all economic stakeholders, including the business sector.

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