Surprise: The pandemic significantly shrank America’s wage inequality, and the trend may continue

March 17, 2023, 3:27 PM UTC
The pandemic reversed 40 years of a widening wage gap.
Christopher Dilts—Bloomberg/Getty Images

The gulf between America’s highest-paid and lowest-paid workers has widened for 40 years—that is, until the pandemic struck. In a surprising twist, the gap narrowed dramatically during the pandemic and its immediate aftermath, reversing about one-quarter of the wage inequality that had built up over the previous four decades. Now, even in today’s inflationary, slow-growth, post-pandemic economy, the latter trend may well continue.

The unexpected discovery arrives in a paper by David Autor of MIT and Arindrajit Dube and Annie McGrew of the University of Massachusetts. Among the most noteworthy findings:

  • Compared with pre-pandemic pay, wages of the lowest-paid workers increased, while wages of the highest-paid workers decreased.
  • Wages of the least educated workers increased more than the wages of the most educated workers, reducing the college wage premium. 
  • Similarly, the youngest workers did better than older workers. 
  • Wages of female workers held up better than wages of male workers. 
  • Black and Hispanic workers’ wages went up, while non-Hispanic white workers’ wages went down.

Across those dimensions, wage inequality decreased thanks to a combination of pandemic-related effects. Pre-pandemic, low-wage workers hesitated to leave their jobs because they often couldn’t go a week without a paycheck and feared that a new job might not work out. Employers took advantage of that market imperfection, enabling them “to mark down wages below competitive levels,” says the new paper, citing many previous studies.

Fast-forward to the pandemic, businesses that employed large concentrations of low-wage workers—such as restaurants, hair salons, stores, hotels, and childcare centers—shut down in vast swaths. “If those workers ever had employer loyalty or connection to the employer, that was severed,” says Autor. Inadvertently, they became more willing to seek new jobs.

At the same time, unprecedented government stimulus payments meant that “those workers, for the first time in a long time, had some household liquidity,” says Autor, making it easier for them to move around and take time finding the best new job. Then, as the pandemic subsided, low-wage industries became the hotbed of the greatest surge of post-pandemic worker demand, with Americans indulging in revenge tourism and dining out.

The result was a suddenly different market for low-wage labor. Unemployed low-wage workers faced abundant new opportunities, and workers with jobs found they could jump directly to a new job more easily than in past years. This low-friction job-to-job movement was especially significant in raising wages because employers had to beat the applicant’s current pay.

For the first time in decades, low-wage workers were in the driver’s seat. Employers now had to hire quickly in a transformed, intensely competitive labor market. Result: By mid-2022, workers in the 10th percentile by pay were making much more money, even after adjusting for inflation, than before the pandemic; workers in the 90th percentile were making less. The 40-year polarization of the labor market was moving backward.

The new research doesn’t address the prospect of this trend continuing, but Autor believes the odds are good. He notes that the crucial element of the recent trend is a tight labor market. “Anything that makes the labor market really tight effectively causes low-wage workers to be much more likely to quit than high-wage workers,” he says. “Because why would you quit a highly paid job?” 

Today, he says, “We’re in a structurally tight labor market. We have small entering cohorts, low fertility, massively artificially reduced immigration, and a rapidly growing retired population.” Those trends aren’t new—the labor market has been tightening for years. In 2016, the unemployment rate fell below 5%, once regarded as full employment, and stayed there until the brief spike in the pandemic. It’s now 3.6%. Combine all those factors, Autor says, and he thinks the tight labor market will persist.

That should be welcome news to America’s low-paid workers. Their economic prospects remain challenging, but just maybe they’re finally improving.

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