Pandemic Containment and Inequality in a Developing Economy

Using high frequency individual-level panel data from India, we show that income inequality, measured as the ratio of high-skilled to low-skilled income, increased sharply following the imposition of lockdown triggered by COVID-19. To
explain this fact, we integrate a canonical SIRD epidemiological model into a general equilibrium framework with high-skilled and low-skilled workers, each choosing to work either from their work locations (onsite) or from their homes (remote). Onsite and remote labour are imperfect substitutes, but more substitutable for high-skilled relative to low-skilled workers. Upon introducing the containment policies calibrated to match the Indian experience, our model can explain between 24 and 60 percent of the observed increase in inequality. We also find that there is a higher incidence of infections among the low-skilled workers as they optimally choose to work more onsite compared to their high-skilled counterparts. Implementing direct transfers for low-skilled workers reverses this increase in inequality and improves the effectiveness of the containment policies.