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Reduced Wage Inequality Since the Pandemic

Summary:
Since the start of the pandemic in early 2020, wage growth in the United States has tended to be higher for those at the bottom of the wage distribution. The evidence is from Mitchell Barnes, Lauren Bauer, and Wendy Edelberg, who provide a useful figure illustrating these dynamics for one of their “11 Facts on the Economic Recovery from the COVID-19 Pandemic” (Hamilton Project at the Brookings Institution, September 2021).  The top lines show growth in nominal wages: the bottom lines show growth in wages after adjusting for inflation. Thus, two conclusions can hold true at the same time: 1) those in the lowest income quartile are doing better than those in the top quartile; and 2) the surge of inflation in recent months has meant that the real buying power of income has dropped.

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Since the start of the pandemic in early 2020, wage growth in the United States has tended to be higher for those at the bottom of the wage distribution. The evidence is from Mitchell Barnes, Lauren Bauer, and Wendy Edelberg, who provide a useful figure illustrating these dynamics for one of their “11 Facts on the Economic Recovery from the COVID-19 Pandemic” (Hamilton Project at the Brookings Institution, September 2021). 

The top lines show growth in nominal wages: the bottom lines show growth in wages after adjusting for inflation. Thus, two conclusions can hold true at the same time: 1) those in the lowest income quartile are doing better than those in the top quartile; and 2) the surge of inflation in recent months has meant that the real buying power of income has dropped.

Reduced Wage Inequality Since the Pandemic

Granted, the gap here between lowest and highest quartile is not enormous: we’re talking a matter of a few percentage points. But if the change was going the other way, with wage gains more weighted to those in the higher income group, that would be worthy of notice. This seems worthy of notice, too. Barnes, Bauer, and Edelberg write: “Some sectors have seen particularly strong wage gains. For example, over the past 12 months average hourly earnings in the leisure and hospitality sector have grown nearly twice as fast as the overall private industry average. Other sectors seeing strong gains in hourly earnings include retail trade,
transportation and warehousing, and financial activities.”

Why are those at the bottom of the income distribution doing better just now? My guess is that many of the jobs at the bottom of the income distribution were more severely disrupted by the pandemic: for example, think about jobs lost and disrupted in retail stores, or in travel-related industries. As overall GDP growth has recovered, those industries are trying to re-hire. But there are still a lot of pre-pandemic workers who are staying out of the labor force, at least for now. As a result, there are lots of job vacancies along lots of people quitting jobs (which is often a prelude to moving to a new job). Put these together, and the wages for lower-skilled workers are being bid up.

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