Our thinking

Wage gap compression

8 December, 2023

One of the many depressing narratives of our times is about inequality, and the fact that it is continually getting worse. Analysis from economists, notably Thomas Picketty, have fed this story, providing evidence that the gap between rich and poor is getting ever wider. So it’s with interest that we read a recent leader in the Economist claiming the truth may be more complicated. Its analysis suggests that the wage gap, at least in the developed world, is in fact shrinking. This is to say that the wages of those lowest earners are rising at a faster rate than those of the highest earners.

The explanation for this counter-intuitive fact is that three of the pillars of labour markets, namely digitisation, demand and demography, have shifted to positively impact workers. What does this mean? Well, let’s take them in sequence…

First, digitisation has increased the value of historically lower paid trades. Where previously computer literate college graduates were in high demand, now AI has started to be able to do much of this work and it is manual work, which must be done by humans, which is of value.

Second, demand for labour remains high with governments across the developed world spending liberally to reinstate the economy to its previous productivity after a fallow period of the pandemic.

And finally, demography. Consistently high demand is challenged by fewer workers, reducing populations mean the workforce is more and more valuable to the economy. As the Economist says – immigration is more important than ever!

We’d argue that wages are only part of overall economic inequality, and that multiple other forms of inequality intersect with it to compound its impacts. But we also feel, strongly, that pay is at the heart of business responsibility. And we therefore welcome this as positive news, long may it continue.

By Anna Heis