Wage Inequality May Be Starting to Reverse

We don’t know if this narrowing in inequality will last. Perhaps it is a function of labor shortages that, like semiconductor shortages, will disappear as the pandemic recedes. Maybe it is the result of a tight labor market whose days are numbered as the Federal Reserve seeks to cool the economy.

But there are reasons to think something more profound is at work. For decades, technological change, globalization and the rise of the information economy favored society’s top earners. Those forces may be stalling.

First, a caveat: Inequality is highly sensitive to how you define and measure it. Nonwage income such as capital gains and dividends skews the picture toward more inequality, while taxes and government transfers skew it the other way. It matters if you study the top 1% or the top 20%, hourly or annual income, households or workers, and how you adjust for inflation to compute real wages.

Here, we’ll examine only one narrow benchmark: nominal workers’ wages, which is where labor market dynamics are most directly felt.

Since February 2020, average hourly earnings are up 15%, but for production and nonsupervisory employees only, they are up 17%—meaning managers have lost ground to the managed. Production wages equaled 85.6% of total hourly wages in November, the highest such ratio since comparable data began in 2006. 

Wages by educational achievement, a proxy for skill, show a similar reversal. From 1997 through 2017, wages of college graduates grew about half a percentage point a year faster than wages of high-school graduates, according to the Federal Reserve Bank of Atlanta. Since early 2021, they have grown more slowly.

For the first time in four decades, wage inequality is falling, thanks to rising wages at the bottom, according to a recent presentation by

David Autor

of the Massachusetts Institute of Technology and

Arindrajit Dube

and

Annie McGrew,

professor and Ph.D. student, respectively, at the University of Massachusetts Amherst. They find younger high-school graduates are one of the few groups coming out ahead of inflation.  

Some of this was catalyzed by the pandemic, which shrank the supply of people willing to do traditionally low-paid work. Many dropped out of the labor force, retired, or died from Covid-19. The college-educated labor force was 5% larger last month than in February 2020; the high school-educated and high school dropout labor force is 4% smaller. (Data between the two periods isn’t strictly comparable.)

College is still a great investment, but maybe not as great as it once was. Employers are dropping degree requirements to fill front-line vacancies, even as they trim head office positions, the sort that university graduates typically fill.

The pandemic also changed the nature of work. A lot of lower-paid jobs such as in hotels, nursing homes, restaurants and stores can be done only in person, and the pandemic made that work riskier, more inconvenient and stressful. 

The pandemic has shown that many jobs can be done remotely—especially higher-paid information-intensive occupations such as computer, mathematical and legal jobs, according to a University of Chicago study. Employees love remote work because it saves on time and money for commuting, eases child and eldercare, and lets them live where they want. Not surprisingly, the demand for remote jobs exceeds the supply. 

A study by

Nick Bloom

of Stanford University and four co-authors concludes the “amenity value” of remote work is worth 6.8% of pay for those earning $150,000 or more, but just a quarter of that for those earning between $20,000 and $50,000. The upshot is that employers have to pay more to fill in-person positions and less to fill remote positions, which is compressing the wage gap.

Technological change, long a driver of inequality by making some workers’ skills obsolete and others’ more valuable, seems to have lost force. Employers rushed to digitize during the pandemic but the productivity payoff has been a wet firecracker. Predictions that truck and taxi drivers would be displaced by self-driving vehicles proved painfully premature.

In fact the most talked about technology breakthrough of 2022, artificial intelligence, could compress wages by undercutting people who make their living manipulating words and data rather than physical objects. “Whereas robots perform ‘muscle’ tasks and software performs routine information processing, AI performs tasks that involve detecting patterns, making judgments, and optimization,”

Michael Webb,

then at Stanford University, wrote in a 2020 paper.

He cites clinical laboratory technicians, chemical engineers, optometrists, and power plant operators as jobs that can be done by AI.

Globalization widened inequality in past decades as millions of good-paying blue collar jobs were lost to China and other low-wage countries, but deglobalization is now in vogue as the U.S. seeks to insulate its supply chains from China’s influence. Since Congress proposed in 2020 to subsidize new semiconductor factories in the U.S., 40 projects, $200 billion of investment and 40,000 jobs have been announced, according to the Semiconductor Industry Association.

These numbers are small relative to the economy but are part of a trend. Manufacturing’s share of private employment shrank in every recession since 1945. Today, though, it stands roughly where it was before the pandemic.

Immigration, another facet of globalization, fell sharply after 2016 and that has exacerbated labor shortages in industries long dependent on immigrant labor, such as nursing homes, trucking and construction, bolstering the wages of its workers—many of them immigrants. 

Changes to technology, demographics and globalization move slowly. In 2023, they will probably matter a lot less to workers than whether the economy falls into recession or inflation finally retreats. Yet if those forces persist, they may in time come to redefine the labor force’s underdogs.

Write to Greg Ip at [email protected]

We don’t know if this narrowing in inequality will last. Perhaps it is a function of labor shortages that, like semiconductor shortages, will disappear as the pandemic recedes. Maybe it is the result of a tight labor market whose days are numbered as the Federal Reserve seeks to cool the economy.

But there are reasons to think something more profound is at work. For decades, technological change, globalization and the rise of the information economy favored society’s top earners. Those forces may be stalling.

First, a caveat: Inequality is highly sensitive to how you define and measure it. Nonwage income such as capital gains and dividends skews the picture toward more inequality, while taxes and government transfers skew it the other way. It matters if you study the top 1% or the top 20%, hourly or annual income, households or workers, and how you adjust for inflation to compute real wages.

Here, we’ll examine only one narrow benchmark: nominal workers’ wages, which is where labor market dynamics are most directly felt.

Since February 2020, average hourly earnings are up 15%, but for production and nonsupervisory employees only, they are up 17%—meaning managers have lost ground to the managed. Production wages equaled 85.6% of total hourly wages in November, the highest such ratio since comparable data began in 2006. 

Wages by educational achievement, a proxy for skill, show a similar reversal. From 1997 through 2017, wages of college graduates grew about half a percentage point a year faster than wages of high-school graduates, according to the Federal Reserve Bank of Atlanta. Since early 2021, they have grown more slowly.

For the first time in four decades, wage inequality is falling, thanks to rising wages at the bottom, according to a recent presentation by

David Autor

of the Massachusetts Institute of Technology and

Arindrajit Dube

and

Annie McGrew,

professor and Ph.D. student, respectively, at the University of Massachusetts Amherst. They find younger high-school graduates are one of the few groups coming out ahead of inflation.  

Some of this was catalyzed by the pandemic, which shrank the supply of people willing to do traditionally low-paid work. Many dropped out of the labor force, retired, or died from Covid-19. The college-educated labor force was 5% larger last month than in February 2020; the high school-educated and high school dropout labor force is 4% smaller. (Data between the two periods isn’t strictly comparable.)

College is still a great investment, but maybe not as great as it once was. Employers are dropping degree requirements to fill front-line vacancies, even as they trim head office positions, the sort that university graduates typically fill.

The pandemic also changed the nature of work. A lot of lower-paid jobs such as in hotels, nursing homes, restaurants and stores can be done only in person, and the pandemic made that work riskier, more inconvenient and stressful. 

The pandemic has shown that many jobs can be done remotely—especially higher-paid information-intensive occupations such as computer, mathematical and legal jobs, according to a University of Chicago study. Employees love remote work because it saves on time and money for commuting, eases child and eldercare, and lets them live where they want. Not surprisingly, the demand for remote jobs exceeds the supply. 

A study by

Nick Bloom

of Stanford University and four co-authors concludes the “amenity value” of remote work is worth 6.8% of pay for those earning $150,000 or more, but just a quarter of that for those earning between $20,000 and $50,000. The upshot is that employers have to pay more to fill in-person positions and less to fill remote positions, which is compressing the wage gap.

Technological change, long a driver of inequality by making some workers’ skills obsolete and others’ more valuable, seems to have lost force. Employers rushed to digitize during the pandemic but the productivity payoff has been a wet firecracker. Predictions that truck and taxi drivers would be displaced by self-driving vehicles proved painfully premature.

In fact the most talked about technology breakthrough of 2022, artificial intelligence, could compress wages by undercutting people who make their living manipulating words and data rather than physical objects. “Whereas robots perform ‘muscle’ tasks and software performs routine information processing, AI performs tasks that involve detecting patterns, making judgments, and optimization,”

Michael Webb,

then at Stanford University, wrote in a 2020 paper.

He cites clinical laboratory technicians, chemical engineers, optometrists, and power plant operators as jobs that can be done by AI.

Globalization widened inequality in past decades as millions of good-paying blue collar jobs were lost to China and other low-wage countries, but deglobalization is now in vogue as the U.S. seeks to insulate its supply chains from China’s influence. Since Congress proposed in 2020 to subsidize new semiconductor factories in the U.S., 40 projects, $200 billion of investment and 40,000 jobs have been announced, according to the Semiconductor Industry Association.

These numbers are small relative to the economy but are part of a trend. Manufacturing’s share of private employment shrank in every recession since 1945. Today, though, it stands roughly where it was before the pandemic.

Immigration, another facet of globalization, fell sharply after 2016 and that has exacerbated labor shortages in industries long dependent on immigrant labor, such as nursing homes, trucking and construction, bolstering the wages of its workers—many of them immigrants. 

Changes to technology, demographics and globalization move slowly. In 2023, they will probably matter a lot less to workers than whether the economy falls into recession or inflation finally retreats. Yet if those forces persist, they may in time come to redefine the labor force’s underdogs.

Write to Greg Ip at [email protected]