Hit hardest by the pandemic in the beginning, low-wage workers are now reaping the biggest gains in their paychecks. The main reason: These workers are more susceptible to changes in the job market.
Higher earners typically have more power in the workplace because they are harder and more expensive to replace, leading to higher wages no matter what's happening in the labor market, according to a new paper by researchers at Harvard University and Copenhagen Business School. This provides them with more stability when labor market conditions are bad, but also with fewer gains when the labor market tightens — such as now.
That's not the case for lower earners.
“It's just a huge reversal in power in this labor market,” Justin Bloesch, a Ph.D. candidate in economics at Harvard University, told Yahoo Money. “The only way that low-wage workers in the U.S. have any sort of leverage is if there are way more job openings than there are people who are searching.”
That’s what’s happening now, as various factors from health concerns to child care needs keep low-wage workers from filling the nearly record-number of job openings in the economy. As a result, their wages are climbing.
The bottom 25% of earners saw their wages grow by 5.1% in October year over year, according to the Federal Reserve Bank of Atlanta, while higher earners saw an increase of less than 4%. Wages in leisure and hospitality — a sector battered by the pandemic — have increased the most among all industries — 13% from pre-pandemic levels — according to the Labor Department.
After millions of layoffs and furloughs early in the pandemic, the sector along with retail trade now have the highest levels of job openings and quits — a sign of workers’ confidence — since the economy has reopened.
“There's a lot of demand for labor, which is almost entirely due to the big fiscal stimulus,” Bloesch said. “When fiscal spending steps in, it keeps people's incomes up. There's demand for goods and there's demand for labor and the consequences of that fall most heavily on low-wage workers.”
‘Good or bad conditions can be sustained for a long time’
Companies invest less in their lower-wage employees, and those workers’ fortunes are less tied to the company’s performance and more correlated with the broader labor market. For higher earners, it’s the opposite.
For instance, leisure and hospitality lost nearly half — 8.2 million — of its 16.9 million pre-pandemic jobs, while the financial activities sector that largely employs higher earners lost just 3% — or 279,000 — of its 8.9 million pre-pandemic jobs, according to data from the Labor Department.
“A lot of higher-wage jobs have long-term relationships that take a lot of investment both on the worker side and the firm,” Bloesch said. “We didn't see a lot of stories in 2020 of big layoffs of white-collar workers.”
Improving or deteriorating conditions in the labor market are usually longer-lasting, according to Bloesch, meaning the tight labor market and wage growth trend for low-wage workers may be here to stay for some time, especially if the supply chain disruptions are resolved.
“Good or bad conditions can be sustained for a long time,” he said. “This level of tightness probably isn't going to last, but wages will rise and maybe settle at a higher level.”
Denitsa is a writer for Yahoo Finance. Follow her on Twitter @denitsa_tsekova