Inequality on the rise

Imagine an economy with two sectors:

a.    One with an emphasis on lower-value services, with a large labor share comprised of lower income workers (haircuts)

b.   One with an emphasis on higher value goods & services with a lower labor share comprised of higher income workers (smart phones and Netflix)

The crisis has resulted in an overall drop in consumption, but also a one-time shift in consumption from sector a to sector b. This will result in the following:

·     Unemployment among low-wage workers

·     Stable or increased employment among higher wage workers

·     Reduced sales of low value services (haircuts)

·     Increased sales of high value goods and services (smart phones and Netflix)

This shift will lead to:

·     Greater income inequality (marked by higher *average* wages as lower wage workers become unemployed)

·     Reduced labor share of national income (achieved largely at the expense of lower paid workers)

·     Relatively stable sales tax receipts (sales taxes tend to rest on goods not services)

·     Relatively stable income tax receipts (higher income people pay income tax)

·     Collapse in prepared food, lodging and other service-based taxes

We need targeted relief for lower income workers and local governments right now..