Free response question

IEO past paper: 2024 International Economics Olympiad, open questions

Open Question 3. Lockdown and Inequality During the first UK national lockdown in 2020, the government announced a furlough scheme for all full-time workers. Under this scheme, firms could apply for government support to pay up to 80% of the wages of workers who were unable to work (for example, because the firm was required to close during the lockdown). Other countries also implemented similar schemes during 2020. The Lorenz curve below describes the distribution of income before the COVID-19 pandemic, for a hypothetical country that consists of unemployed workers, employed workers, and owners (of capital). Each employed worker earns the same wage, and there are no unemployment benefits. Population is ranked from lowest to highest income: the bottom 10% are unemployed, the next 80% are employed workers and the top 10% are owners. The Lorenz curve is made of straight lines joining these points, and the Gini coefficient is 0.36. $$\begin{array}{lcc} \text{Point} & \text{Cumulative share of population (\%)} & \text{Cumulative share of income (\%)} \\ \hline \text{Start} & 0 & 0 \\ \text{Last unemployed worker} & 10 & 0 \\ \text{Last employed worker} & 90 & 60 \\ \text{Last owner} & 100 & 100 \end{array}$$ Suppose that this country implemented a furlough scheme during the COVID-19 pandemic (Scenario A). When the scheme was in effect, unemployment increased by 2 percentage points and the cumulative share of income for employed workers fell to 54%. Assume that all workers who remained employed were furloughed. Suppose that if the government had not implemented the furlough scheme, the unemployment rate would have increased by 10 percentage points and the cumulative share of income for employed workers would have been 48% (Scenario B).