The novel coronavirus pandemic has divided the American labor force into two classes: those who are essential to keeping society running, and everyone else.
They also happen to be among the lowest-paid workers in the country. So why the disconnect? And, conversely, why are relatively nonessential jobs in such fields as entertainment and finance so well-compensated? To find out, we asked economists across the ideological spectrum to explain.
Supply and demand
The concept of supply and demand loomed large in most of their answers. “Many of the ‘essential’ occupations are easy to enter, and jobs with a large supply of potential workers are paid less,” said Wojciech Kopczuk, an economic professor at Columbia University.
Stocking shelves or running a cash register, for instance, might not require specialized knowledge or extensive training. Although there are skill differentials within such positions — a new cashier is going to be slower than someone who has been at it for a decade, for instance — the basic qualifications are relatively low. There’s an extent to which “anyone can do the job,” at least at its most baseline level.
“There’s nothing paradoxical” about this scenario, said Adam Ozimek, the chief economist at Upwork. Because there are far more people who can fill such roles, they tend to command a “pretty low wage.”
Marianne Bertrand of the University of Chicago points to the “scalability” of a job as another factor. “An entertainer can provide value to millions of people,” the economics professor said. “A janitor, however skilled at his job, can only clean one building at a time.”
But not all high-earners are worth their paychecks, said Gabriel Zucman, an economist at the University of California at Berkeley. “The crisis illustrates that there’s a lot of arbitrariness in the wage-setting process, especially (but not only) at the top of the wage ladder,” he said. “Salaries of millions of dollars (common in the financial industry and among corporate executives today) often have little measurable social utility” and are instead the result of individuals and companies manipulating political, social and economic circumstances to pad their profits, he said.
The Diamond-Water Paradox
Mark Perry, an economist at the American Enterprise Institute, said the Diamond-Water Paradox could go a long way in explaining how wages work. The root of the paradox is this: Water is essential for all life, while diamonds are not. Yet diamonds are much more valuable than water, in the same way that an NBA star gets paid much more than a sanitation worker.
The answer lies in what economists call the “marginal value” of a product. As NPR’s Planet Money explained it in 2018, the value of water depends greatly on how much of it you have. The value of a single gallon of water is almost priceless — you literally need it to survive. But if you stock up 10 gallons, that last gallon isn’t worth as much as the first. And if you’ve got a reservoir of water, most of it has little value to you — you simply can’t use it all up. More importantly, it’s relatively easy to acquire all that water, because water is plentiful in most places.
The value of something like a diamond, on the other hand, has less of a relationship to how many diamonds you have. Diamonds are scarce. If you have one diamond, you can sell if for $1,000. If you have 100 diamonds, you can sell each of them for $1,000. The value of any one diamond isn’t as dependent on how many of them you have.
Perry says there’s a similar dynamic at work in the labor force. “‘Essential’ workers exist in abundance and are arguably more valuable in total than the value of higher-skilled workers like CPAs, economics professors and hedge fund managers,” he said. “But because ‘essential’ workers are plentiful and higher-skilled, highly educated, highly experienced workers are scarce in comparison, the marginal value and wage of an hour of a high-skilled worker’s time greatly exceeds the marginal value and wage of an hour of a low-skilled worker’s time.”
But there’s a new strand of research within economics that questions some of the profession’s long-standing explanations for wage inequality. Marshall Steinbaum, an economist at the University of Utah, says some recent papers show differences in skill aren’t great predictors of differences in income — there are big differences in earnings between workers who do the same job, for instance, and companies have increasingly been able to crowd out all their competitors, and as a result pay workers whatever they want, regardless of skill, because there’s nobody else to hire them.
“I think a big part of the explanation is the erosion of the institutions that once improved workers’ standing and bargaining power vis a vis employers, while employers have commensurately gained power,” he said. Big businesses and allied policymakers have worked in tandem to weaken unions, oppose minimum wage legislation and loosen labor restrictions, for instance.
“This, and not skills, is the reason for earnings inequality between workers,” Steinbaum said, “and the enormous discretion American bosses have to dictate take-it-or-leave-it terms to dependent workers is the core reason our ‘essential’ workforce is in such dire straits.”
Chicago’s Bertrand says policymakers have tools at their disposal — smarter antitrust policies, an expanded Earned Income Tax Credit, minimum wage hikes, even a universal basic income — to improve the lot of low-wage workers who do the economy’s most essential jobs. Whether the pandemic changes their inclination to use those tools remains to be seen.