Inequality in China Affected by the COVID-19 Pandemic

Published Nov 1, 2022

On June 8, 2022, Peking University National School of Development held the 61st China Economic Observation (CEO) Meeting, addressing issues on "Boosting China's Economy: Complexity, Urgency and Strategy". This article is based on the keynotes of Dr. Gordon G Liu, Peking University BOYA Distinguished Professor of Economics, and Dean of Peking University Institute of Global Health and Development.

From April to May 2022, a new wave of COVID-19, dominated by Omicron, broke out in China, and its economy was seriously impacted. Economists predicted that economic growth in the first and second quarters of this year would come under enormous pressure. According to the World Bank's China Economic Brief released in June, China's real GDP growth may decline to 4.3 percent in 2022, down 0.8 percentage points from its December forecast. Following the World Bank’s policy recommendation, China may consider taking decisive actions in three ways when trying to achieve high-quality growth: increasing the role of consumption in economic growth, addressing social inequalities, and reinvigorating innovation and productivity growth.

Different Dimensions of the Pandemic Impact

The pandemic impact on health can be divided into two situations. One is the mortality impact on life expectancy of the population, due to extreme conditions resulting in immediate death events; The other is via the morbidity effect in terms of increased disabilities or decreased health-related quality of life associated with the pandemic.

The impact of the pandemic on individual income can also be analyzed from two levels. First, the pandemic has seriously affected the incomes of vulnerable groups, leaving more people below the poverty line. Second, the pandemic has caused more people's incomes to fall, but not to the extent below the poverty line. Below I will discuss some of our preliminary analysis, focusing on the two extreme cases of the outbreak.

A recent World Bank research shows that since 2020, the impact of the global pandemic on lives and poverty has been structurally different across low-, middle-income, and high-income countries. For low-income countries, the pandemic impact is most significant in the form of income effect, partly related to the fact that most low-income countries are distributed in the equatorial tropics, where the risk of death from the pandemic is relatively small, but the financial resilience is too weak for the poor to stand for such a large economic shock. As an upper-middle income country, China shares a similar pattern with a larger scale of the pandemic effect on income growth relative to live savings. In response to the pandemic, China has implemented a nationwide highly strict prevention and control measures, leading to impressive outcomes in minimizing direct loss of lives relative to the cost of reduced socio-economic welfare. In contrast, for high-income countries, the poverty effect caused by the pandemic is relatively small, but health effect is dominating in terms of lost life years.

Inequality in the Impact of the Pandemic on Income

Because the pandemic impacts vary largely across different regions and people of different incomes, it is important to take a close look at the effect from the perspective of inequality measures. As a reference, a CGE model analysis by a research team at Beijing Normal University finds that the national per capita income fell by 7.87% in 2020, but the income of people in the lowest 10% of the income fell by 17.48%, far more serious than the average level.

Using data from the Peking University China Family Panel Survey (CFPS), we conducted an empirical study of the pandemic impact on the income changes for the poor groups in 2020. Following to the World Bank's classification, an absolute poverty line is defined at $1.9/day for individuals in low income economies, and a relative poverty line is set at $5.5/day for the upper-middle-income countries, and $21.7/day for the high-income groups. Based on the $1.90/day absolute poverty line, there were over 70.61 million people nationwide living below the poverty line in 2020. Furthermore, when conducting a counterfactual analysis, the number of people below the absolute poverty line would have dropped to 56.48 million if there was no pandemic, implying that the pandemic caused 14.12 million people to fall below the absolute poverty line. Alternatively, if based on the ¥5.5 relative poverty line (that is, RMB 1,089 per month), over 296.55 million people were below the poverty line, of which over 42.36 million fell below the poverty line because of the pandemic shock to the economy.

Inequality in the Pandemic Impact on Employment

Judging from the epidemic impact on employment, the epidemic has led to a large increase in the overall unemployment rate and has also aggravated the inequality of structural unemployment. According to the state statistics report, in April 2022, the unemployment rate of the national population aged 16-24 exceeded 18%, an unprecedented record in recent history. Such a high unemployment rate was largely driven by a vast number of migrant workers who failed to re-enter the city to work following the highly restrictive pandemic control policy. The high unemployment led to a significant decline in the incomes of vulnerable groups, thereby exacerbating income inequality.

In fact, in the context of an increase in overall unemployment, the vulnerable groups are much more severely affected. A PKU graduate thesis in 2022 examined the pandemic impact on the labor structure of the labor market. Using the publicly posted job recruitment information of listed companies nationwide in 2020, the study found that although the pandemic has led to an overall decline in the demand for employment of listed companies, the labor demand of listed companies has shifted to workers with a higher degree and digital-related knowledge skills. As a result, the job postings actually increased by 22.6% for employment with a master's degree or above, and up by 12.6% for employment with bachelor's degree. On the contrary, the job demand for people with lower educational levels all dropped substantially, in a range of falling by 38.2% for high school degrees, 48% for secondary school or technical school degrees, and as high as 81% for no educational requirement.

It is clear that the problem of unemployment inequality caused by the pandemic is very prominent, and the living capacity and savings of vulnerable groups are very fragile. At present, the pandemic still remains worldwide, and it is very unlikely that it would go away completely in a foreseeable time window. In the meantime, the new Omicron variants continue to follow a pattern of increasing contagiousness but decreasing severity in terms of morbidity and mortality effects. As such, it is increasingly meaningful and economically rational to better address the optimal response to the pandemic from the perspective of economic "trade-off" between the risk of death and poverty trap. This trade-off consideration is especially critical for the poor and the most vulnerable groups who have little savings to sustain without work, or who are mostly engaged in manual labor that can hardly switch from offline to online work requirements. Therefore, whether it is to strengthen the poverty alleviation to improve the poor’s livelihood, or to promote the national stated goal of achieving common prosperity, the national public policy must give more serious and specific consideration to the surviving capacity of the very poor and vulnerable groups with little savings and limited human capitals when taking the pandemic response actions and addressing the challenges of digital divides.

Written by: He Youxi and Edited by: Wang Xianqing, Bai Yao

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