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Covid-19 has worsened inequality. So why are shares higher than ever?

Shocked freelancer hipster man looks to laptop screen and can not believe unpleasant news. Pop-eyed frightened businessman trader raises one's glasses above his eyes. Trader monitoring stock exchange market.
(Source: Getty)

The coronavirus crisis will exacerbate wealth and income inequality, and this will have consequences for investment returns, economists have warned.

In a note, Oxford Economics economist John Payne said the pandemic tended to worsen the wealth divide over the medium- and long-term, as debt rises for lower earners while the wealthy see their savings increase.

Inequality on multiple fronts (income, wealth and consumption) has all gotten worse. Jobs that can’t be done at home – e.g. waiting tables at a restaurant – are among those hardest-hit in the pandemic.

“Pandemics damage confidence in using in-person services, which disproportionately exposes low-skilled work to displacement,” Payne said.

“A unique feature of this pandemic is that the ability to work from home is proving a key factor in determining job losses – those that can are typically in higher paid jobs.”

The Australia Institute Centre for Future Work director Jim Stanford said wage growth has never been lower – and in many instances, companies have had to make sweeping job cuts to preserve the bottom line.

“Long-term stagnation in wages, and the shrinking share of labour compensation in total GDP, has underpinned a historic rise in profit margins – and that contributes to higher stock markets,” he told Yahoo Finance.

“Share prices, in the long run, are supposed to reflect the profits of real companies, and that depends on how little they can get away with paying their workers.”

According to Rum Rebellion editor Greg Canavan, one look at US stock markets or the price of gold would have you thinking it was the “best of times” – despite the fact that “we’re in perhaps the deepest global recession in history”.

In the last week, the S&P 500, the Dow and Nasdaq have all hit or come close to their all-time highs in the last week.

But consumer spending and economic recovery will be held back by the impact of income and job losses to millions of workers in Australia and around the world, according to Stanford.

“Booming stock markets may look good in the financial headlines, but they do not augur broad financial recovery,” he said.

“To the contrary, they are a symptom of the underlying problem – growing inequality – not the solution.”

Wealth tends to be passed down from generation to generation, meaning the rich generally remain rich.

But if lower earners’ income suffers and they have less money to spend, the economy stalls.

“High income earners tend to save more of their income than low income earners, so if income becomes more concentrated in the rich it could mean less spending in the economy and less revenues for companies,” AMP Capital chief economist Shane Oliver told Yahoo Finance.

“Increased inequality could also lead to more social tensions which would be bad for productivity, economic growth and hence share market earnings.”

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