The winter COVID surge has reversed progress on economic inequality

Inequality in the U.S. continues to grow as the economy undergoes a compositional change in the labor market.

Driving the news: While higher wage earners have largely recouped their losses from the coronavirus pandemic's shutdowns earlier this year, those at the bottom of the income spectrum remain out of work at high levels and are losing more ground.

Why it matters: Wealth and income inequality, which have been shown to cause major political and economic disruptions for countries, had been at a record high in the U.S. before the pandemic.

• The response to the pandemic made it more extreme and new data show it worsened further at the end of 2020.

What happened: The winter surge of COVID-19 stopped and then reversed the progress in returning to work that had been made by the lowest-income workers, the New York Fed points out in a research paper released Tuesday.

• But it had limited impact on high- and middle-income workers, further boosting the employment gap between the groups.

Why it happened: "Due to a combination of government restrictions and behavioral changes people made to avoid exposure to the virus, the largest losses during the pandemic accrued to the leisure and hospitality industry—most notably, restaurants, bars, and hotels—as well as retail, both of which tend to employ large numbers of lower-paid workers," researchers wrote.

• "Further, lower-wage workers have much less ability to work remotely."

The big picture: According to data from the Social Security Administration, 45% of all U.S. workers in 2019 were included in the category of the lowest-income workers, earning less than $30,000 a year.

Between the lines: The pandemic caused "outsized job losses for women, minorities, and younger workers as the pandemic took hold," research shows, and the response of policymakers only exacerbated the divide.

• A separate report from the New York Fed concluded that the actions taken by the Federal Reserve in response to the pandemic did little to reduce unemployment inequality but did notably increase wealth inequality.

Watch this space: A similar phenomenon is happening for businesses.

• The latest optimism survey from the National Federation of Independent Business found small business confidence at an eight-month low with the number expecting business conditions to improve over the next six months falling to its lowest since 2013.
• In contrast, the latest economic outlook index from the Business Roundtable, made up of CEOs from some of the largest U.S. companies, jumped 22.2 points from its Q3 level and was 5 points above its historical average. Expectations for improved sales jumped 29.9 points.