Did the pandemic change income inequality?

Decades from now, people who lived through the pandemic will remember it as a horrible period. Over a million people in our country died, with millions more sick but still surviving. Thousands of businesses closed forever, learning was lost in schools, and lives were disrupted in multiple ways.

But could there be some positive impacts from the pandemic? Some say new technology prompted by the pandemic for remote interactions in business, medicine, and shopping is a plus. The pandemic revealed dependences we have developed on other countries for some key products. This has sparked renewed interest in “re-shoring” of manufacturing to our country, which would both reduce dependences and create jobs.

One of the biggest economic issues of our time has been increasing income inequality. This simply means the income gap between those with higher incomes and those with lower incomes has been widening. However, it appears the pandemic may have closed some of that gap. Here’s how.

A big reason for broader income inequality has been economic changes in the 21st century. Technology has been the driver of much of the recent economy. Firms in the tech sector need highly trained workers, often with four-year college degrees or more. This has led to large pay increases for college-trained workers in technology and also in many other professional occupations. The pay raises for college-trained workers swamped those for other workers, thereby leading to bigger gaps between high-paid and low-paid workers.

Yet some recent national statistics indicate this outcome may have changed. In the last two years, national numbers show hourly earnings have risen fastest for occupations paying the least, while at the same time increasing the slowest for occupations paying the most. This has resulted in income inequality actually decreasing in the last two years.

Two forces have collided to reduce income inequality. The first is the pandemic. The pandemic has made many people cautious about taking jobs requiring personal contact, particularly if the job is low paying. Indeed, many workers who had these kinds of jobs upgraded their skills when the economy was in shutdown mode. Hence, when the economy reopened, these individuals moved on to employment with better pay.

The second force is demographics. Many low-paying jobs are taken by young workers. But due to a declining birth rate, increases in younger workers have significantly slowed. This has limited the supply of low-wage workers.

As a result, with relatively fewer workers seeking their jobs, firms in low-paying businesses have needed to increase hourly earnings to compete for employees.

The recent narrowing of income inequality has also happened in North Carolina. From 2020 to mid-2022 (the latest available data), average weekly earnings in high-paying occupations, such as management, finance, and the professions, rose 2.7%. For middle-paying occupations, including manufacturing, construction, health care, and education, weekly earnings jumped 7.2%. But for low-paying occupations in clerical, personal services, and food and hospitality businesses, the gain in average weekly earnings was 15.3%, twice the gain for middle-paying occupations and more than 5.5 times the increase for high-paying occupations.

The result is that income inequality in North Carolina in mid-2022 was at the lowest level in two decades.

Of course, many low-paying businesses that raised worker wages by over 15% in less than two years likely had to also increase their prices significantly. But this would also happen if the big pay jump was for high-paying or middle-paying occupations.

One question is whether workers in low-paying occupations will continue to see similar gains, or even if they will keep their current gains? Much will depend on how businesses using low-paying occupations adjust over the long-run. Will the businesses add more technology and consequently reduce their employment of people? Indeed, McDonald’s announced it was testing the first all-digital store that operates with very few workers. Is this a peak at the future?

So the recent news on income inequality in the country and in North Carolina is good. Will the trends continue, or will they be temporary?