Wages rose much faster for America’s lowest-paid workers than for their better-paid colleagues between 2019 and 2023, a new report says, a striking reversal after four decades of widening wage inequality.

Hourly pay rose by 12.1% in those years for low-wage Americans, from $12.06 to $13.52, boosted by policy decisions that aided those workers during the pandemic, according to a report from the left-leaning Economic Policy Institute.

In the same span, hourly wages grew by 0.9% for the highest earners, from $57.30 to $57.84.

The study compared wages across incomes, adjusting for inflation. It found the highest growth among workers in the 10th percentile for income, meaning that nine-tenths of workers earned more. The slowest wage growth came at the high end of the pay scale, represented by workers in the 90th percentile for earnings.

The trend is significant, the report says, because the wage gap between low- and high-income Americans had been growing for the previous 40 years.

“The current business cycle is a notable reversal of fortune for lower-wage workers in the U.S. labor market,” the report states.

Will the trend continue? That depends on several variables, the report says, including the federal government's willingness to cut interest rates and to raise the national minimum wage.

Did the pandemic bailout help low-wage workers, or hurt them?

According to the institute’s analysis, the data illustrate that Congress and the Trump and Biden administrations responded to the pandemic with policy moves “that made a real difference in people’s lives: Wages grew for those who needed it most.”

Other economists disagree: The pandemic-era economic bailout sparked the worst inflation in four decades, they contend. Despite the wage growth, low-income workers now face rising debt and dwindling savings.

Congress approved trillions of dollars in pandemic relief at the pandemic’s height, dispatching stimulus checks, enhanced jobless benefits and other aid.

By one argument, those funds saved low-wage workers from poverty and delivered them into a more favorable labor market.

“The government set up a bunch of different relief funds essentially for those workers and those businesses to survive during that time when they were shuttered,” said Elise Gould, a senior economist at the Economic Policy Institute. “When those jobs came back, [workers] weren’t as desperate to take the first job that came along. They were allowed to be a little bit pickier.”

By another argument, the federal government effectively shut down its own economy, and then set up relief programs that discouraged idle workers from returning.

“We had the government lock down the economy and sort of force millions of people out of work,” said Jai Kedia, a research fellow at Cato Institute, the libertarian think tank. “The government was actually paying people to stay home.”

Once businesses reopened, Kedia said, “you had this sudden, huge demand for workers, but no one was willing to work.”

To Kedia, the Covid-19 bailout represents a failure of policy, rather than a triumph. The inflation crisis of the past two years “tells me that the policy failed,” he said. “I don’t know why we’re even debating this.”

Wage inequality is on the rise

The Economic Policy Institute analysis, published March 21, serves a larger theme of wage inequality. The think tank releases periodic reports on the growing gap between the earnings of the highest- and lowest-paid Americans.

Between 1979 and 2021, the wages of Americans in the top 1% of earners grew by 206%, after adjusting for inflation, according to an earlier analysis by the nonprofit. In the same years, wages for the bottom 90% grew by only 29%.

Policymakers allowed the wage gap to widen, the analysis says, by failing to raise the federal minimum wage, tolerating excessive unemployment and allowing corporate globalization, among other factors.

In the new report, the think tank argues that policymakers should sustain the wage gains for lower-paid workers by raising the federal minimum wage, which has stood at $7.25 since 2009.

Twenty-five states are raising their own minimum wage in 2024. California made headlines this month by bumping its minimum wage to $20 for some workers.

Opponents warn that employers will respond by cutting workers and raising prices. Advocates say higher wages can help lift low-paid workers out of poverty.

“You’re still talking about $40,000 a year,” Gould said, alluding to the approximate annual earnings of someone paid the highest minimum wages available today. “And if you’re trying to raise a family on that, it can be very difficult.”

The report also recommends long-term investments in unemployment insurance, stronger labor standards and, most urgently, federal action to cut interest rates.

More:Powell hints Fed still on course to cut rates three times in 2024 despite inflation uptick

“Even a mild recession” triggered by high interest rates “will do significant harm to low-wage workers and their families,” the report says.

The Federal Reserve had forecast three interest-rate cuts this year, contingent on easing inflation. Last week, Federal Reserve Chair Jerome Powell suggested that plan is still on track.