Low-Wage Jobs Are Becoming Middle-Class Jobs
Millions of low-income families are experiencing less financial stress and even a modicum of comfort.
Last month, Target announced that it would pay new employees as much as $24 an hour and extend health benefits to anyone working at least 25 hours a week. The company is hardly the only one coughing up cash to lure in new workers or retain those on staff. Starbucks recently set a national minimum wage of $15. McDonald’s, Dairy Queen, and Subway franchises have been offering signing incentives. Lowe’s is giving bonuses to hourly workers this month.
This is good news. What is even better is that such pay bumps are not just a recent trend. After a brutal few decades in which low-wage jobs proliferated and the American middle class hollowed out, the working poor have started earning more—a lot more. Many low-wage jobs have become middle-wage jobs. And incomes are increasing faster for poorer workers than for wealthier ones, a dynamic known as wage compression.
As a result, millions of low-income families are experiencing less financial stress and even a modicum of comfort, though the country’s surging rents and rising pace of inflation are burdening them too. The yawning gaps between different groups of American workers—Black and white, young and old, those without a college degree and those with one—have stopped widening and started narrowing. Measures of poverty and income inequality are dropping.
I hesitate to call this the “Great Compression,” given that earnings disparities remain a dominant feature of the American labor market and American life. (Plus, economists already use that term to refer to the middle of the 20th century.) But it really is a remarkable trend, a half-decade-old “Little Compression” that policy makers should do everything in their power to extend, expand, and turn great.
Labor economists have identified two phenomena—one incremental and slow, one radical and sudden—that have boosted the fortunes of the working poor. The first is that the unemployment rate has gotten low enough for long enough to force companies to compete for workers, thus raising wages. The jobless rate trickled down excruciatingly slowly during the Obama years, as did the ratio of job seekers to job openings. But by the time President Donald Trump took office, employers in many parts of the country started to struggle to find and retain workers.
“We finally had a tight labor market with a well-functioning job ladder, meaning that people were leaving the worst-paying jobs,” Arindrajit Dube, an economist at the University of Massachusetts at Amherst, told me. States and cities lifting their minimum wages might have helped bolster the trend—indeed, one analysis found that, before the coronavirus hit, wage compression was occurring only in states that were lifting their minimums.
COVID was the radical and sudden second change. Tens of thousands of businesses that employed millions of low-wage workers reduced their hours or closed, in some cases permanently. The jobless rate spiked to 14.7 percent. The federal government made unemployment-insurance payments more comprehensive and much, much more generous, while also showering American families with a series of stimulus checks and a large, if temporary, child allowance. This—perhaps counterintuitively—led businesses to pay workers more when they reopened.
Crucially, workers increase their wages by leaving jobs, not by staying at them: A cashier making $13 an hour at a coffee shop gets $16 an hour by taking a position at a pet store, then $19 an hour by becoming a manager at a restaurant. Yet workers tend to look for new positions less often than you might think, given the financial incentives. “There’s a lot of turnover and churn among low-wage workers, but even so, people don’t find changing their jobs that easy,” Elise Gould, a labor economist at the Economic Policy Institute, told me. “Maybe you don’t happen to see the Help Wanted signs. Maybe you don’t think you’ll get hired. Or you don’t have the time to look for another job.”
The pandemic sparked a giant, economy-wide game of musical chairs, spurring workers flush with stimulus cash to reassess their employment options and forcing employers to make their job offerings more attractive to workers. “We don’t have direct evidence for what happened, but we have indirect evidence that tells a consistent story,” Dube told me. “Disruption plays this big role.” As did the giant fire hose of money, to use a technical term, that Washington unleashed to combat the COVID recession. The government gave low-income workers a financial cushion, which meant they could take their time in picking a new job. And it ensured that there was ample demand in the economy, so businesses were eager to hire.
The economy has normalized since the early phase of the pandemic. Yet low-wage workers keep earning more and more because the jobless rate has returned to such a low point and so quickly. The country has a “tight labor market” with a “well-functioning job ladder,” to use Dube’s terms. Workers remain much likelier to quit a job than they were during the Obama years. Very-low-wage employers, such as day cares, are struggling to hire. And starting wages at big businesses keep rising.
The low jobless rate should continue to benefit lower-wage workers, labor-market experts told me, though their earnings might not rise as quickly as before. Indeed, Federal Reserve data show that wage growth is already cooling off. “The savings that people built up and the security they had from the expanded unemployment-insurance payments, the child tax credit, the stimulus checks—those are going away,” Gould said. “We have probably not seen the full effects of the interest-rate hikes on the labor market. It’s been remarkably resilient. I don’t know if that will continue.”
Still, there’s plenty that policy makers could do to amplify the trend. The Biden White House has already pushed to ban noncompete agreements and increase the rate of unionization, two things proven to bolster the incomes of the working poor. Washington could also push to increase the supply of housing (to make it easier for workers to move to good jobs) and reduce corporate concentration (to give workers more choice among employers) to help bump wages up.
Ultimately, the country shouldn’t wait for a COVID-scale crisis to enact policies that create a favorable climate for working people. “It’s unfortunate that in the last 40 years, we’ve only had a few such episodes,” Dube said. “This is what we want the labor market to look like.”