Low-wage workers saw big pay jumps after the pandemic. High earners did even better.

A widening earnings gap could be one reason inflation is falling slower than expected

Supercharged pay growth has been a defining factor in the labor market since the pandemic-driven economic downturn. As the economy rebounded from unprecedented job loss, rapid-fire hiring led to double-digit pay gains that threatened to accelerate already soaring inflation.

To see how this swift increase in pay affected workers, employers, and the economy, we examined payroll data by income levels. Our findings contain clues to understanding the higher-for-longer inflation that has plagued the U.S. economy.

Using an anonymized sample of more than 13 million workers, we observed year-over-year pay changes for each of those individuals every month between March 2021 and March 2024. We calculated the individual’s annual equivalent pay based on the average gross pay rate observed in the last 12 months, then sorted workers into quartiles based on their beginning annual pay.

What we found

The lowest earners, those people in the first or bottom quartile, had the largest percentage growth in annual pay gains over the last three years. But workers at the top of the pay distribution benefitted more because the level of their pay gains was greater.

For that reason, the gap between the highest and lowest earners widened by 5 percentage points. That’s an increase of more than $12,282, to $116,954 in March 2024. Top earners now make nearly 5 times more than what lowest-income workers earn—489 percent, to be precise.

In short, even though lower-paid workers saw strong post-pandemic pay increases, high-paid workers did even better. Workers in the bottom quartile have lost ground relative to earners in the top quartile.

Here’s how it happened

In March 2020, as the pandemic shutdown began in the United States, the median pay for the first quartile of wage earners stood at $19,708. Median pay for the next-lowest quartile was double that amount, at $40,000. Pay at the top half of the distribution was $63,984 and $124,666 for the third and fourth quartiles, respectively.

A year later, in March 2021, pay gains for the first quartile had increased by 7.5 percent. By contrast, pay gains for second- and third-quartile earners were 3.5 percent and 2.4 percent, respectively. For the highest earners, pay gains were only 1.8 percent.

That year-over-year growth for the lowest-paid earners continued to accelerate each month for the next 12 months, peaking in March 2022 at 16.1 percent. Pay gains for the highest earners peaked at 5.8 percent in May 2022, and held at that rate for seven months before edging down.

Of course, one reason low-wage earners saw big percentage gains is because they started from a small base. While their pay growth surged relative to their higher paid cohorts, growth in the actual amount of pay—the pay level—told a different story.

For the lowest earners, median year-over-year pay gains peaked at $2,936 in March 2022. For the highest earners, those annualized pay increases peaked in October 2022 at $7,387, more than double the increase for lowest earners.

Median pay for low-wage workers increased $2,224 annually on average during the three-year recovery. But the typical top earner saw an average annual gain of $5,806.

Who are these low-wage earners?

Low-wage earners are more likely to be young, female, and employed in customer-facing industries. Small employers tend to have a greater share of these low-wage workers.

Sixty percent of workers in the bottom quartile are female, compared to 33 percent in the top quartile, according to March data. The bottom pay quartile also is younger.

Workers in the top quartile are concentrated in information, professional and business services, and finance. The lowest paid are clustered in leisure and hospitality, and education and health services.

People in the bottom pay quartile also are heavily concentrated in smaller companies, whereas those in the top quartile are concentrated in larger companies.

The take-away

The recent run of strong pay gains in the United States has coincided with rising inflation. While low-wage earners have seen bigger relative increases in pay since the pandemic shutdown, they also have been hardest-hit by inflation.

That’s because workers who earn less spend a larger share of their income on food, housing, and other necessities. Rising inflation coupled with a widening pay gap have made the disproportionate impact of inflation even more acute.

Our data suggests a scenario in which employers raise prices in response to pay growth at the bottom of the distribution, while pay level growth at the top of the distribution encourages more discretionary spending. It’s a combination that could keep inflation higher for longer.

Recent ADP pay data shows that pay growth again is heating up. Year-over-year pay gains for the lowest earners jumped from 8.7 percent in February to 9.6 percent in March, the biggest increase of any group. High earners had the smallest increase, from 3.9 percent in February to 4 percent in March. Median pay for the lowest quartile was $23,924, and median pay for the highest quartile was $140,878.