Average wages for employed workers largely unaffected by pandemic. Plus, another look at income inequality.

Pew examines wage growth during the pandemic and finds average wages for employed workers held up well.

Despite the severity of the shock to the U.S. labor market from the coronavirus pandemic, the earnings of employed workers overall were largely unaffected by the pandemic.

Here’s why.

Earnings overall have held steady through the pandemic in part because lower-wage workers experienced steeper job losses. Thus, the typical employed worker in 2020 earned more than the typical employed worker in 2019. A slowdown in inflation in 2020 benefited all workers, boosting the purchasing power of their earnings. While unemployed workers lost their earnings, at least some relief came through unemployment insurance, a federal package known as the CARES Act and a moratorium on residential evictions.   

That reference to “at least some relief” appears to be an understatement, in that the extraordinary federal packages meant some unemployed workers received more in UI benefits than they were making in the jobs that were lost. 

A quick sidebar: the average wage boost resulting from a labor market including fewer low-wage workers is a factor in the proposed workers’ compensation rates in Washington, as Emily Makings of the Washington Research Council writes.

According to L&I, today’s proposal “is driven by cost-of-living adjustments for pensions, which were triggered by an increase in the state’s average wage.” As I wrote in June, the state’s average annual wage grew by 10.1% in 2020—its highest growth ever. As a result, in July, L&I announced that workers’ compensation time-loss and pension benefit payments will also increase by 10.1%. The Employment Security Department attributed the high average wage growth to “the fact that thousands of lower-paid workers lost their jobs during the pandemic and higher-paid workers remained employed.”

The Pew report gets into the weeds pretty quickly, making excerpting a bit of a challenge. We encourage you to read it. This observation, however, is worth calling out.

Although the change in the composition of employed workers toward higher-wage workers clouds the picture of how earnings have evolved during the pandemic, it is possible to gain insight by focusing on the change in earnings for the same workers over time. Federal household survey data used in this analysis records the earnings of many workers at two points in time a year apart. The sample of employed workers matched over time is a subset of the overall sample, which varies with the addition and departure of some survey respondents. It offers another view of how earnings changed during the COVID-19 recession and afterward.

The median wage of the varying sample of employed workers – the full cross-section of workers by quarter – had risen to $23.19 in the second quarter of 2020. This represented an increase of 10.2% over the median wage in the second quarter of 2019. The median wage for the matched sample of employed workers – the same workers over time – also increased over this period, from $23.15 to $24.12, or by 4.2%. While both samples point to higher earnings in 2020 despite the onset of the pandemic, the much greater increase in the varying sample points to the sizable role played by the loss of lower-wage jobs in driving up the increase in the median.

Pew also remarks,

With the impact on the median earnings of low-wage workers being of limited duration, the pandemic also does not seem to have left a lasting imprint on income inequality. In 2019, the median earnings of low-wage workers were about 20% of the median earnings of high-wage workers. Among employed workers, this ratio budged little through the recession and in the period since, with low-wage workers earning 22% as much as high-wage workers in the second quarter of 2021.

What these point-in-time observations miss is the mobility dynamic: People move up and down the income ladder over the course of their lifetimes. Mark Perry, an economist and senior fellow at the American Enterprise Institute, has a good discussion of the issue.

Most of the discussion on income inequality focuses on the relative differences over time between low-income and high-income American households. But it’s also informative to analyze the demographic differences among income groups at a given point in time to answer questions like:

  • How are high-income households different demographically from low-income households that would help us better understand income inequality?
  • For low-income households today who aspire to become higher-income households in the future, what lifestyle and demographic changes might facilitate the path to a higher income?

His discussion proves some answers to those important questions. It’s worth reading in full, but here’s his conclusion (emphasis his).

Household demographics, including the average number of earners per household and the marital status, age, and education of householders are all very highly correlated with Americans’ household income. Specifically, high-income US households have more income-earners on average than lower-income households, and individuals in high-income households are far more likely on average than individuals in low-income households to be well-educated, married, working full-time, and in their prime earning years. In contrast, individuals in lower-income US households are far more likely than Americans in higher-income households to be less-educated, working part-time, either very young (under 35 years) or very old (over 65 years), and living in single-parent or single-member households.

The good news about the Census Bureau is that the key demographic factors that explain differences in household income are not fixed over our lifetimes and are largely under our control (e.g., staying in school and graduating from high school and college, getting and staying married, working full-time, etc.), which means that individuals and households are not destined to remain in a single-member, low-income quintile forever. Fortunately, studies that track people over time find evidence of significant income mobility in America confirming that individuals and households move up and down the income quintiles over their lifetimes, as the key demographic variables highlighted above change…

He provides links to the studies he references. Mostly, as he says, there’s good news in the data.