An Inclusive Economic Recovery

The pandemic has had extreme impacts on economies and has reached almost every country in the world (with many in recession). Lockdowns and restrictions, high levels of unemployment, low productivity due to health risks, weak demand (drop in household spending), etc. have all had lasting impacts. However, the pandemic has impacted different countries, communities, groups, and demographics differently. Although recovery from the pandemic is looking strong in many parts of the world, with successful vaccination roll-outs and strict law enforcement, unfortunately, the impacts of the virus will remain in some economies for years to come. This presentation will explore why governments have roles to play in ensuring that economic recovery post-pandemic is inclusive and accounts for the hardships faced by all communities. I argue that a recovery that is focused on ensuring GDP/national income levels are back to pre-pandemic levels is NOT sufficient. Post-pandemic recovery planning is the perfect opportunity for global economies to create plans which focus on sustainable and socially supportive economic growth to ensure the highest possible degree of well-being for citizens.

Before discussing the topic of an inclusive recovery, I would like to briefly go through an important economic concept. The Keynesian Model in macroeconomic theory is different from that of the monetarist/new classical model. Whereas the new classical model
assumes that the economy will automatically tend back to the full employment level of output at potential GDP due to wage flexibility in the labor market, the Keynesian model acknowledges that in the real world, there are labor market rigidities that cause wage and price downward inflexibility. This means that when AD is low and the
economy is in a recessionary gap (where unemployment is higher than the natural rate and equilibrium GDP is less than potential GDP), there is no guarantee that the free market will return to full employment. Increases in AD (eg. from 1->2) need not
lead to an increase in the price level, which means that the economy can remain in this recessionary gap in the absence of government intervention. This model illustrates the role of the government in ensuring the economy can progress from the recessionary gap and tend back to potential GDP to stimulate investment and economic growth.

These are the 3 potential shapes of economic recovery that I will be looking at. The first indicates a sharp decline in national income followed by a quick sharp increase back to the same trajectory indicating increasing potential output. A U-shaped recovery is similar to a V-shaped recovery, but the process is much slower. The third one is a K-shaped recovery, in which some industries experience a V/U-shaped recovery but others continue to suffer. Economies around the world are experiencing recoveries which show similar characteristics to each of the shapes outlined here, but I will focus on the United States.

The United States has experienced a very sharp recovery in many aspects of the economy, so many argue that recovery has followed a sharp V-shape. The strong growth was mostly due to easing anxiety over the pandemic as vaccines have been rolled out across the country, boosting domestic demand and allowing businesses, such as restaurants and bars to reopen. The Biden administration has also released relief stimulus packages that have boosted household spending and accelerated economic growth, bringing the economy back to pre-pandemic levels when looking at figures like GDP or the stock market. However, this snapshot of the economy is not representative of the whole country and fails to account for many communities that continue to suffer. Therefore, I argue that the current shape of the recovery differs for individual demographics, and industries that were most affected by covid (leisure, hospitality) are generally made up of low-wage, minority workers. Thus, the recovery
for individuals which are undoubtedly dependent on their income from work, is strongly impacted by the industry they work in.

The diagram shows the economy in a recessionary gap when AD is weak and unemployment is greater than the natural rate. Government intervention is needed to boost AD (invigorate animal spirits and household spending). An inclusive recovery, much like any other economic recovery, would still aim to achieve this and get the
economy closer to potential output. The factors of production are the various inputs required for the production of g/s in an economy. The most important FOP for most firms tends to be labor. The reason why an increase in the quality/quantity of FOP causes long-term growth (increase LRAS) is because more FOP or more efficient FOP allow for more productive production and increases the production capacity of firms. This means that the potential output of an economy increases.

This data shows that although unemployment figures may seem promising (943000 jobs added in July, rate of unemployment 5.4%), there are still millions of unemployed workers continuing to struggle. Those included in the unemployed/displaced are mainly low-wage workers, who were already in economically precarious situations before the pandemic. They earned less than a third of the average hourly wage of the displaced mid/high-wage workforce, and many were living below 200% of the poverty line. The pandemic exacerbated the situation due to job losses, and this was disproportionately worse for low-wage workers as those industries impacted most by Covid (eg. services, leisure, hospitality, gig economy) which require face-to-face
interaction are predominantly made up of low-wage migrant workers. This data presents a need for an inclusive recovery, as it is inequitable and unjust to strive for a speedy and strong economic recovery when millions of workers who make up important parts of the economy are left behind. Therefore, I firmly believe that economic objectives for post-pandemic recovery should shift from ensuring we return to pre-pandemic levels of eg. GDP/employment to ensuring the economy comes out of the crisis better, stronger, and more inclusive.

The controlled racial pay gap is a comparison of pay between white men and people of color who have the same job and qualifications. As we can see, research into the racial wage gap shows us that racial bias persists in the U.S. workforce. Not only was this a large issue before the pandemic hit, but it has been severely exacerbated by the economic implications of the virus. This data that we have now seen on both racial bias in unemployment and wages show that there is clear potential gain for the economy if POC/minorities were to be paid fairly for their work. Many minorities work in positions that do not utilize their full skills, which can be thought of as a widespread underutilization of labor. Policies that advocate for fair pay across
ethnicities/demographics would make the most economic sense as this aims to increase the amount of labor (a FOP) available to use in the economy and will shift out the LRAS.

To summarise, the economic benefits of an inclusive recovery include achieving long-term economic growth as well as a lower risk of high inflation. Although neoclassical/right-wing economists may argue against an economic recovery focused on social objectives, there are clear reasons as to why an inclusive recovery is the most beneficial for society and does not necessarily involve neglecting economic objectives.

  1. In the Keynesian model, the long-run aggregate supply curve can shift outwards mainly when there is a greater quantity/quality of FOP, or due to improvements in technology/efficiency. An inclusive recovery aims at building a better workforce through training, education, fair remuneration, etc. Therefore, this can be thought of as an improvement in the quality/quantity of the most important FOP (labour) as the workforce becomes more able to complete the work most needed by the economy. Additionally, aspects of an inclusive recovery such as improved childcare support could even increase the quantity of labour, which would also cause an outward shift in the LRAS and thus long-term economic growth which increases the potential output that can be produced by an economy.
  2. Another benefit of long-term economic growth is that is reduces the inflationary consequences of short-term economic growth (aka. Short-term increases in AD). In the diagram, increases in AD without corresponding increases in LRAS increase real output as well as the price level. Sustained increases in the general price level is known as inflation, which has undesirable consequences if it exceeds the 2-3% range. However, if LRAS increases at the same time, short-term growth can be achieved without a subsequent increase in the price level (or at least with a lower increase). This helps avoid an inflationary spiral, which tends to be common following recessions.

Other than the economic benefits mentioned, an inclusive recovery is necessary for other reasons pertaining to social justice as well.

  1. First and foremost, it is immoral to strive for economic benefits that do not advantage (or at least do not intend to advantage) all citizens equally. Economies must ensure that wellbeing is a significant social objective, which can only be achieved if all demographics are given the same rights, resources, and opportunities.
  2. John Rawls’ theory of justice states that equal distribution of resources should be the desirable state of nature, as opposed to following utilitarian philosophies; holds that every individual has an equal right to basic liberties, and that they should have the right to opportunities and an equal chance as other individuals of similar ability.

John Rawls presented two principles of justice that self-interested and rational individuals would choose when separated by the veil of ignorance. The veil of ignorance is a method to work out the basic institutions and structures of a just society. According to Rawls, this demands that we think as if we are building society from the ground up, in a way that everyone who is reasonable can accept. The situation before any particular society exists; this situation = Original Position. Essentially, after this position, there are two justice principles: Principle of Equal Liberty & Principle of Equality. The former states that all citizens have an equal right to basic liberties, and the latter holds that economic principles should be arranged in a way to meet two requirements; ie. the least advantaged in society should receive

a) greater number of benefits + the economic inequalities should be arranged in a way that no individual is blocked from occupying any position, regardless of their social background.

b) The data we looked at before on the controlled racial wage gap in the US clearly indicates that workers with similar abilities are not given the same opportunities. Many POC are deprived of their right to a basic living standard as they are denied work based on their background, which they cannot change.

c) I strongly believe that this disparity highlights a role for the government to intervene and provide the necessary means for individuals of all backgrounds to receive justice and advance in society regardless of their race.

As we touched on earlier, the recovery isn’t affecting all workers equally. Just as Black and Hispanic communities have struggled with higher rates of infection and death since the beginning of the COVID-19 pandemic, communities of color are continuing to bear the brunt of high unemployment and economic insecurity, even as the overall numbers fall. These low-wage minority workers typically work in sectors such as retail and hospitality, which pose health risks during a pandemic and are therefore subject to shut down, and so we’re much closer to economic normalcy in sectors like construction and professional and business services than we are in sectors like leisure and hospitality. Ensuring an inclusive recovery must involve paying attention to these distinct disparities and ensuring that investment and grants are rightfully placed into these especially hard-hit sectors. Furthermore, policies that encourage career mobility and basic economic stability are also necessary to generate the right jobs and ensure they are available to those who need them. It is necessary to enhance education and training workforce systems to help workers adapt to changing skill needs while also strengthening worker protections and improving job quality, focusing on issues such as pay, stable and predictable hours, and adherence to health and safety standards.

Furthermore, many women have been impacted at far greater rates. Women make up 39 percent of global employment but account for 54 percent of overall job losses. One reason for this greater effect on women is that the virus is significantly increasing the burden of unpaid care, which is disproportionately carried by women. The lack of childcare available for working mothers means that they either reduce their working hours or leave their jobs entirely. The low wages associated with “pink collar” jobs have long contributed to the gender disparities within the labor force, and the shortage of affordable, high-quality childcare systems perpetuates the outdated stereotypes of women’s societal roles. COVID-19’s disruption to employment, childcare, and school routines has had considerable impacts on the economy and has pushed millions of women and families to financially unstable situations. Just as we mentioned how POC disproportionately represent low-wage jobs, the same applies to
women. Many single-parent families (in which single mothers are much more common) rely on a single stream of income which determines their living expenses; if parents are not fairly remunerated, it puts many households into poverty. The childcare and education systems need remodeling to change this disparity. Affordable and accessible childcare enables more women to either join or stay in the
workforce, which has several benefits to our argument. Firstly, it is much more equitable as women would then have the same opportunities as men when taking on jobs requiring more hours. Additionally, this adds more labor to the workforce, making the economy more productive and increasing the economy’s potential output. Solutions to this gender disparity should not exclusively focus on short term COVID-19 recovery, but should also make long-lasting changes that aim to close the wage gap, improve working conditions and family leave options, and better align the childcare and school systems to the needs of working parents so mothers who want to work can do so.

  1. The Families First Coronavirus Response Act (FFCRA) provided 12 weeks of parental paid leave and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided enhanced unemployment benefits that reduced poverty rates in America. The CARES Act also provided direct aid to states to address immediate problems in education budgets and provided the Child Care and Development Block Grant (CCDBG) with $3.5 billion to keep childcare providers afloat. But many of the most important provisions of these two pieces of legislation have expired, will expire soon, or were inadequate. And, these were just short-term solutions to a much more deep-rooted problem.
  2. Biden’s proposed 10-year, $1.8 trillion American Families Plan would spend $225 billion to improve child care. This funding would help providers improve the quality of programs; establish a $15 minimum wage; expand training for early childhood caregivers; and reduce the cost of care for low-income families. An additional $425 billion in Biden’s plan would go toward establishing universal preschool for all three- and four-year-olds. But while investment in public infrastructure tends to have bipartisan support, investment
    in “soft” infrastructure eg. childcare and education hasn’t received the same support from Republicans in the US Congress.
  3. The AFP also plans to extend or make permanent enhancements to several key tax credits that were in the COVID rescue bill → this reduces poverty and provides economic boosts to families with children. Many Republicans oppose the fact that this plan will be funded through tax increases on Americans, but these tax increases are only significant to the highest income bracket and large corporations (top 1%).

Apart from increasing living standards, the elements of the AFP have other impacts on
the economy.

  • Tax credits will increase the level of disposable income within households, thus shifting the AD curve rightwards. Government spending (an element of AD) will also contribute to this shift, due to the large amounts of investment into childcare and education.
  • The improvements in childcare will allow a) parents who worked less hours to be able to work more and b) parents who were previously not in the labour force as they tended to unpaid house work/child care to enter the labour force. Both of these points have the effect of shifting the LRAS curve outwards, thus increasing the level of potential output/GDP within the economy.
  • Increasing both LRAS and AD simultaneously results in the reduction of inflationary pressures normally brought about by increases in AD, which we discussed before.
  • Mid-recovery inflation (esp. in the US) has skyrocketed because the
    comparison to prices now versus a year ago when much of the country was in lockdown is very drastic. Although many argue that current rates of inflation are just transitory, if they get too high, IR’s will have to go up, which puts the economy at risk of recession again. Additionally, inflation rates are worrying as they can have lasting impacts on consumer confidence and spending ie. consumers believe that prices will continue rising so they spend now and save later. Therefore, it is in the economy’s best interest to reduce inflationary pressures and ensure the economy doesn’t overheat during its recovery.

Although the current policies which are being designed to tackle the issue of racial and gender disparities within unemployment figures have clear positive impacts on the economy, I also believe there are some other points that the US has failed to address. In regards to the childcare system, although tax credits and investment into childcare corporations may alleviate some pressures, there also needs to be more
systemic changes made to the system. High labor turnover rates in the childcare industry exist due to generally low wages. Childcare educators must be fairly compensated and trained in order to improve the quality, quantity, and stability of the industry.

When it comes to racial disparities, the racial gap in people receiving jobless aid persists despite enhancements to the unemployment system through the CARES Act. Supporting labor unions and collective bargaining ensures workers of all backgrounds can have more leverage to negotiate wages and other terms of their working conditions. The Biden administration can try to change labor laws to allow for “sectoral bargaining”, in which workers organize by industry to reach a collective agreement that covers all workers in a sector rather than across one firm. Additionally, there are other elements of recovery for racial minorities that can be introduced which are not related directly to economics. For example, acts like the George Floyd in Policing Act would aim to combat police misconduct, excessive force, and racial bias in policing. Such acts would give more power to POC and allow them to be treated the same way as their white counterparts.

A very important factor to consider when looking at building an inclusive recovery is to ensure you are equipping the unemployed with the necessary skills and knowledge they need to be able to find work. In addition to trying to get as many people looking for jobs into work as possible, it is also important for the economy to look beyond this
and try to build a sustainable and equitable framework to avoid distinct disparities within the unemployed. This can be achieved by addressing the main reasons why unemployed workers are finding it hard to get a job, and necessary government interventions to support and provide skills for the unemployed:

  1. Addressing specific employment barriers → Short-term strategies such as providing expanded unemployment benefits or increasing the number of capital projects may help ease overall unemployment, but interventions must address specific employment barriers for heavily affected segments. For example, workers without a college degree may need additional training and
    skills-based education to transition to new career pathways and ensure they have the skillset that firms are looking for.
  2. Tackling structural and technological unemployment requires the consideration of how the pandemic has catalysed the shift to technology-enabled business models in many industries, and how this will affect workers and future skill requirements.
  3. Enhanced training for those looking for work to gain the skills which the economy needs will also lead to long run economic growth, as the quality of labour is improved. Having a better trained workforce with the necessary skills for the future needs of the economy will increase productivity and help those who were greatly disadvantaged by the pandemic to become attractive candidates due to better education and skills.

By Kopal

Hi everyone! My name is Kopal, and I am currently based in Jakarta but have also lived in India and Hong Kong. Through my ongoing studies of both Economics and Business in the IB Diploma programme, my interest in the subjects has piqued. I am passionate about global economic issues and am very keen on developing my knowledge of the fascinating world of economics through writing and sharing. I hope to gather new experiences and form varying opinions through my journey at EconIR web, and look forward to getting to know everyone!