Working Paper: NBER ID: w31010
Authors: David Autor; Arindrajit Dube; Annie McGrew
Abstract: Labor market tightness following the height of the Covid-19 pandemic led to an unexpected compression in the US wage distribution that reflects, in part, an increase in labor market competition. Rapid relative wage growth at the bottom of the distribution reduced the college wage premium and counteracted around one-third of the four-decade increase in aggregate 90/10 log wage inequality. Wage compression was accompanied by rapid nominal wage growth and rising job-to-job separations—especially among young non-college (high school or less) workers. Comparing across states, post-pandemic labor market tightness became strongly predictive of real wage growth among low-wage workers (wage-Phillips curve), and aggregate wage compression. Simultaneously, the wage-separation elasticity—a key measure of labor market competition—rose among young non-college workers, with wage gains concentrated among workers who changed employers. Seen through the lens of a canonical job ladder model, the pandemic reduced employer market power by increasing the elasticity of labor supply to firms in the low-wage labor market. This spurred rapid relative wage growth among young non-college workers, who disproportionately moved from lower-paying to higher-paying and potentially more productive jobs.
Keywords: Labor Market; Wage Compression; Labor Market Competition; COVID-19; Wage Inequality
JEL Codes: E31; J2; J3; J42; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor market tightness (J20) | wage compression (J31) |
| labor market tightness (J20) | higher wages for low-wage workers (J38) |
| job-to-job separations (J63) | wage compression (J31) |
| labor market tightness (J20) | quit elasticity (H30) |
| quit elasticity (H30) | higher wages for young non-college workers (J39) |
| labor market tightness (J20) | reduced employer market power (J42) |