Routinization and Covid-19: a comparison between United States and Portugal

Earnings inequality has been increasing in Portugal and United States in the last 30years and with the recent pandemic outbreak this trend is likely to reach even higher levels. The purpose of this paper is to identify what is the role of automatization in increasing wage inequality, making a comparison between the two countries. Using PSID and Quadros de Pessoal, we find that labor income dynamics are strongly determined by the variance of the individual fixed component. This effect is drastically reduced by adding information on workers’ occupational tasks, confirming that decreasing price of capital and the consequent replacement of routine manual worker shave deepened wage inequality. During the current crisis, we find that the ability to keep working is strongly related with the occupation type. As such, we simulate the impact of a permanent demand shock using an overlapping-generations model with incomplete markets and heterogeneous agents to quantitatively predict the impact ofCovid-19 and lockdown measures on wage premium and earnings inequality. We find that wage premia and earnings dispersion increase, suggesting that earnings inequality will increase at the expenses of manual workers