The Unexpected Compression: Competition at Work in the Low Wage Labor Market

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.