The recent compression of US wage inequality: tightness, turbulence, and power-biased policy

Since the onset of the COVID pandemic, the United States has experienced a sharp compression of wage inequality, reversing roughly one-third of the increase observed since 1980. Many commentators attribute this to expansionary policy and tight labour markets, but new findings show that other factors have been overlooked.

In this paper, Adam Aboobaker and Peter Skott evaluate the extent to which the recent wage compression in the US can be explained by the general tightness of the labour market and/or specific circumstances of the pandemic.

KEY FINDINGS

• Labour market conditions are an important determinant of nominal wage dynamics. However, the magnitude of the compression cannot be explained by a tight labour market alone. Moreover, the timing and scale of the changes point to the importance of turbulence and sectoral demand shifts in addition to tightness.
• Pandemic-specific policy interventions—such as the composition of fiscal stimulus, the accumulation of household savings, and shifts in societal valuation of “essential” or “hero” work—substantially enhanced the bargaining position of low-wage workers.
• Framing the compression primarily in terms of tight labour markets risks conflating aggregate demand management with redistribution, neglecting the role of institutional change, policy design, and shifts in power relations.

AUTHORS

• Adam Aboobaker, Global Development Institute, University of Manchester; Southern Centre for Inequality Studies, University of the Witwatersrand; World Inequality Lab, Paris School of Economics
• Peter Skott, Aalborg University Business School, Aalborg University; (Emeritus) Economics Department, University of Massachusetts Amherst

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