Diverging Wages: How COVID-19 Shaped U.S. Worker Earnings and Regional Inequality

The IMF study reveals significant post-pandemic earnings growth disparities across U.S. counties, with faster recovery in areas less affected by early labor market shocks. Lower-paid workers and smaller firms saw higher wage growth, influenced by labor competition and government support through the Paycheck Protection Program.

The IMF working paper authored by Sophia Chen and Do Lee from the International Monetary Fund, investigates the uneven recovery of worker earnings in the U.S. labor market after the COVID-19 pandemic. Drawing on a detailed employer-employee dataset from Homebase, which includes information on nine million workers across over one million establishments, the study reveals significant discrepancies in earnings growth across different U.S. counties during the pandemic recovery period. Counties that were less impacted by labor market disruptions at the onset of the pandemic saw much faster earnings growth, particularly between 2020 and 2021. In contrast, areas that suffered greater economic shocks during the early months of the pandemic experienced slower recovery in earnings. This pattern highlights the regional disparities in the U.S. labor market's post-pandemic recovery, with implications for wage dynamics and broader economic inequality.

Earnings Growth Disparities Between Regions and Workers

One of the key findings of the study is that this divergence in earnings growth was most pronounced among lower-paid and nonmanagerial workers. In counties where labor market conditions were more robust, workers in these categories experienced much faster earnings growth than their counterparts in areas with weaker labor markets. The research also shows that workers at smaller firms benefited disproportionately from the labor market recovery, with earnings in these companies rising at a faster rate than those in larger firms. Both wage increases and extended working hours contributed to these earnings gains, with additional working hours accounting for a larger share of the total earnings increase. This dynamic is particularly relevant for workers who had been underemployed during the pandemic, as the recovery provided opportunities for more consistent and longer working hours. The evidence aligns with a "job-ladder" framework, where competition in the labor market enables workers to climb into better-paying jobs. In stronger labor markets, more productive firms attract workers with higher wages, forcing less productive firms to either match these offers or risk losing their employees. As a result, earnings increase for workers moving up the job ladder. This job-to-job competition compresses earnings disparities within counties with strong labor markets but exacerbates wage differences between regions with varying levels of economic strength.

The Role of Government Support in Shaping Earnings Recovery

The study also highlights the role of the U.S. government’s Paycheck Protection Program (PPP) in shaping post-pandemic labor market dynamics. As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the PPP provided liquidity to small and mid-size businesses through forgivable loans, helping to sustain payrolls and protect jobs during the pandemic. The researchers found that counties with greater access to PPP funds saw significantly higher earnings growth than those with lower access. Businesses that received PPP loans were required to maintain their employment and compensation levels to qualify for loan forgiveness, creating a direct link between PPP support and local labor market strength. In addition to preserving jobs, PPP loans could also be used for non-payroll expenses, which helped ease financial pressures on businesses and likely prevented deeper cuts to employment and wages. The study’s findings show that in counties with higher PPP support, average earnings increased by 32 percent compared to areas with less access to PPP funding. This boost to local labor market demand through the PPP played a crucial role in moderating the economic impacts of the pandemic and fostering faster earnings growth in the recovery period.

Labor Market Strength and Wage Inflation

The paper’s analysis of wage dynamics is consistent with broader economic models, such as the Phillips Curve, which describes the inverse relationship between labor market slack and wage inflation. The micro-level evidence provided by this study offers a clearer understanding of how labor reallocation within the labor market drives wage adjustments. The researchers observe that wage and hour increases were more immediate and persistent in counties with stronger labor markets, with the effects lasting up to two years after the initial pandemic shock. In contrast, areas with weaker labor markets saw slower wage and earnings growth, reflecting the prolonged impact of the pandemic’s disruptions on local economies.

Implications for Regional Inequality in the U.S.

The divergence in post-pandemic earnings growth also carries significant implications for regional inequality in the U.S. The study found that the gap between high-earning and low-earning counties widened during the recovery, while within counties with strong labor markets, wage disparities between workers narrowed as competition for jobs drove up earnings for lower-paid workers. These findings suggest that while the overall U.S. labor market has recovered from the pandemic, the benefits of this recovery have not been evenly distributed across regions or among workers.

Policy Implications and Future Considerations

The study by Sophia Chen and Do Lee provides important insights into the drivers of post-pandemic earnings growth in the U.S. labor market. By examining the role of labor market competition and government support through the PPP, the researchers offer a nuanced understanding of how regional disparities in economic conditions have shaped the recovery. Their findings have significant implications for policymakers, particularly in terms of addressing the widening spatial inequality in the labor market and designing stabilization policies that account for these diverging trends in earnings growth. As the U.S. economy continues to recover, understanding the mechanisms behind these disparities will be crucial for fostering more inclusive and balanced economic growth.