The US inequality gap is quietly getting smaller

• Income inequality has narrowed in the US, with low-wage workers receiving raises during the pandemic.
• This trend has been tapering off, though labor market competition has benefited wage growth.

Inequality has been the story of the US economy for over a decade.

While the narrative that we're living in a time of heightened inequality persists, the last few years opened up a small window in which that story had a chance to reverse. This was thanks to pre-pandemic minimum wage legislation, coupled with higher raises for lower wage workers in the tumultuous years that followed.

It's a positive sign for millions of Americans, many of whom have enjoyed more disposable income and better financial security.

According to a National Bureau of Economic Research paper, workers in the bottom 10% of wages enjoyed higher wage growth than those in the top 10% as of September 2022. Real wages returned to pre-pandemic levels for those in the bottom 10%, rising over 6% between January 2020 and September 2022, while top earners took a hit. The Federal Reserve Bank of Dallas noted last year this trends stems in part from the "Great Resignation."

David Autor, Ford Professor in the MIT Department of Economics who led the study, told Insider the labor market is becoming more competitive for low-wage workers. Better-paying firms are often the more productive firms, he said, so with more competition, workers have more agency to move to higher-paying ones maximizing productivity.

"If competition for workers has increased, this isn't just good for workers, bad for employers," Autor said. "It also means the labor market is operating more efficiently, that workers are working in more productive firms, so it actually increases economic output."

The American Bar Association argued strong jobs recovery and federal relief programs have given workers more bargaining power, allowing lower-wage workers to negotiate higher salaries or more easily leave positions in search of better-paying ones. Although low-wage workers have slightly narrowed the gap, corporate profits have boomed, allowing those at the very top to stay separated from the rest.

"What you really see in 2023 is that a lot of workers either left because of the pandemic or just refused to take those jobs, and the highest job vacancy rates were in leisure and hospitality," said Harry Holzer, John LaFarge Jr. SJ Professor of Public Policy at Georgetown University's McCourt School of Public Policy. "In terms of old-fashioned supply and demand, employers faced a worker shortage, and it put pressure on them to raise wages."

However, those raises seem to have been short-lived and could be slowing down.

Since late 2022, though, wage growth for low-wage workers still exceeds that for high-wage workers, the gap is thinning, according to data from the Federal Reserve Bank of Atlanta.

In June 2022, low-wage workers saw 7.2% wage growth from the prior year, falling to 6.5% in June 2023. Meanwhile, high-wage workers were at just 3.7% year-over-year wage growth in June 2022, compared to 5.7% in June 2023.

And while wage compression has helped narrow the gap between the bottom and top tiers of the vast majority of Americans who rely on employment for the bulk of their income, the very top of the spectrum, who instead make most of their money from investments in stocks or privately-held businesses, are still doing quite well.

'Moving the needle' on income inequality

According to the Economic Policy Institute, the top 1% of Americans make over 26 times more than the bottom 99% and hold 21% of the nation's total income.

Autor said wage growth is more likely to plateau than continue its upward trajectory. With fewer young adults available for low-paid work, more people retiring, and increased consumption of goods and services, Autor expects the labor market to remain tight for another decade.

"This phenomenon is not likely to just go back to where we were prior to the pandemic because we were already heading in the direction of tightening labor markets for the younger and less educated people who were willing to do physically demanding work," Autor said.

Autor said higher minimum wages, more employment opportunities for non-college workers in sectors such as medicine, and eliminating tax subsidies for the elite could further chip away at inequality.

Holzer cautioned labor market tightness may diminish in the next few years with additional interest rate hikes, adding that AI may displace some lower-wage workers while enabling workers to pivot to more creative opportunities.

Holzer said Biden initiatives such as the Inflation Reduction Act and the CHIPS Act could help with job creation and training, though he anticipates the effects of such legislation will be modest. Some jobs in the fossil fuel industry may be replaced by green energy jobs, though not all regions or economic sectors may be impacted.

"From the vantage point of the whole economy, where it's at 160 million jobs and workers, it's hard for me to see that it moves the needle that much," Holzer said.

What can move the needle more, he said, are gainful employment rules or student debt cancelation that make it easier for people to earn a degree for high-demand jobs. Policies that can nudge employers to create better jobs, expand workers getting profit sharing, and give workers more of a voice could also help close the income inequality gap, he said.