The latest job numbers from the Labor Department are surprisingly positive: Hiring is booming in the shadows of a potential recession. Yet the pattern is uneven: The companies that are hiring are places like restaurants while big-name companies like Amazon, Google, Microsoft, and IBM are laying off workers in numbers not seen since the dot-com crash two decades ago.
Could current trends not only avert a possible recession but also begin to reverse more than four decades of ever-growing U.S. income inequality?
Why We Wrote This
Tech-firm layoffs, coupled with hiring in lower-wage industries like restaurants, signal a shift back toward pre-pandemic job patterns. But for the first time in 40 years, the wage gap is declining.
Key factors that widened the pay gap between rich and poor people – automation, globalization, and immigration – have shown signs of reversing. U.S. companies are bringing some factory work back to the United States. Immigration slowed. And automation in the form of artificial intelligence has reached the point where it might begin to thin the ranks of white-collar industries rather than blue-collar ones.
From the pre-pandemic peak through the end of 2022, hourly pay for restaurant workers jumped 25%, more than double the average pay increase for computer systems designers, who earn more than twice as much as servers, according to the U.S. Labor Department. Says MIT economist David Autor: “For the first time in four decades, wage inequality is falling.”
On one side of Chauncy Street in downtown Boston last week, laid-off tech workers came to the headquarters of internet provider Starry to drop off their company equipment and say goodbye. “It’s sad,” says the security guard downstairs. “I tell them I’m sorry.”
On the other side of Chauncy Street, the Lotus Test Kitchen is hopping. You can smell the spices even before opening the door. Inside, seven food-prep workers make rice bowls for delivery services that will bring lunch to customers all around Greater Boston. The newest employee, who just started that morning, tentatively places toppings on the rice under the direction of a fellow worker. Owner Thomas Xie is interviewing two more applicants that afternoon.
“We have been having a heck of a time finding people,” Mr. Xie says, sitting at the register. At his suburban grocery store, he adds, he could use two or three more workers in addition to the current half-dozen already on staff.
Why We Wrote This
Tech-firm layoffs, coupled with hiring in lower-wage industries like restaurants, signal a shift back toward pre-pandemic job patterns. But for the first time in 40 years, the wage gap is declining.
An economy that is firing high-paid tech workers and hiring low-paid kitchen staff may not sound very healthy. On Friday, the Labor Department reported that the United States added a whopping and unexpected 517,000 jobs last month. Nearly a quarter of those jobs came from restaurants and the rest of the leisure and hospitality sector, which includes travel and art and music, while tech giants like Amazon, Microsoft, and Google have been shedding workers. But in this topsy-turvy economy, fewer programmers and more cooks and servers might actually represent a healthy re-balancing.
At the very least, it’s a snapback to a kind of pre-pandemic normalcy, before lockdowns closed restaurants and boosted home-office tech sales. And if such big job gains continue, it suggests that the U.S. might be able to bring down inflation without sinking into a recession, a so-called soft landing that in practice is very difficult to achieve.
Perhaps the most intriguing question, however, is whether something more fundamental is underway. If the snapback from the pandemic turns out to be a long-term trend instead of a blip, it could begin to reverse more than four decades of ever-growing U.S. income inequality. Automation, which economists believe was a major factor in decimating some of the best-paying blue-collar jobs, may now have advanced to the point where artificial intelligence (AI) could begin to thin the ranks of white-collar industries.
“If you asked people, let’s say a decade ago, they would have thought, ‘Oh, the waiters are easier to automate than programmers,’” says Anton Korinek, an economist and fellow at the Brookings Institution. “Based on what we have seen just in the last year or two, it actually turns out that the opposite is true.”
Big slowdown in Big Tech
After years of growth, the tech sector is retrenching. Although layoffs were well underway last year, they began to accelerate in November after super-entrepreneur Elon Musk bought and tried to remake Twitter, laying off half the workforce in the process. Those cuts were followed by Salesforce (1,000 layoffs); Meta, the owner of Facebook (11,000 layoffs); Amazon (10,000); and DoorDash (1,250), according to Layoffs.fyi, which tracks the announcements. The tech sector announced more cuts last year – 97,000 workers – than any since the dot-com crash in 2000, according to Challenger, Gray & Christmas, a career transition firm.
“We got caught up in some hiring mania the last two years,” says Andy Challenger, senior vice president at the Chicago-based consulting firm. Tech “companies are recognizing they got out ahead of themselves.”
The pace of cuts accelerated even more in January as Salesforce and Amazon announced further layoffs (8,000 apiece) along with Microsoft (10,000); Google’s parent, Alphabet (12,000); IBM (3,900); and a host of smaller tech companies, such as Spotify, Coinbase, and Shutterfly. In 2023, “a major theme will be tech layoffs as Silicon Valley after a decade of hyper growth now comes to the reality of cost cutting,” securities firm Wedbush predicted in a note in January. “The Cinderella ride has ended (for now).”
Some of these cuts may have been overdue as tech firms were hesitant to trim unprofitable units while everyone else was hiring.
“You tend to see a little bit of a piling-on effect of companies just saying, ‘I can let people go right now because the cuts at Amazon and Google are getting all the headlines and I’m not going to get as many,’” Mr. Challenger says.
A 25% jump in pay
For cooks and servers, the picture looks much brighter. After the pandemic closed restaurants and cut industry employment by nearly half, the workforce has steadily expanded and is less than 5% from its pre-pandemic peak. Nearly 9 in 10 restaurants say they’ll hire more workers this year – if they can find them, according to the National Restaurant Association.
The big surprise is the wage hikes for low-income workers. From the pre-pandemic peak through the end of 2022, hourly pay for restaurant workers jumped 25%. That’s more than double the average pay increase for computer systems designers, who earn more than twice as much as servers, according to the U.S. Labor Department.
This disparity isn’t limited to servers and systems designers.
Young high school graduates and workers on the lowest rungs of the income ladder are seeing bigger pay raises than higher-income employees, Massachusetts Institute of Technology economist David Autor told an audience at Princeton’s Bendheim Center for Finance in December. “For the first time in four decades, wage inequality is falling.”
Whether this narrowing of inequality is a blip or a long-term shift is something many economists are now pondering, says Aaron Terrazas, chief economist of employer review service Glassdoor Inc. For the moment, the data isn’t strong enough to say for sure. At worst, the tech sector has eliminated a year’s worth of employment growth. “A lot of laid-off tech workers are finding new jobs relatively quickly,” he says. “The reality is that there is still demand for their skills.”
A third to half of the widening of income inequality since the 1980s stems from automation, many economists believe, as machines replaced highly paid factory workers, while rewarding knowledge workers with ever higher pay. Globalization also played a role by shipping off those jobs to China and elsewhere. So did immigration, which swelled the ranks of low-income workers, making it easier for employers to keep wages low.
Now these trends appear to be reversing. U.S. companies are diversifying away from China and beginning to bring some of their factory work back to the U.S. Due to the efforts of the Trump administration and the pandemic, immigration has slowed, making fewer low-income workers available. The retirement of baby boomers has heightened the employee shortage, and so far, former workers are not returning en masse to the workforce, according to Friday’s Labor Department report. At the same time, AI has reached the point where it can write everything from computer programs to (gulp!) news stories.
Needed: Less-harmful automation?
Mr. Korinek of Brookings calls this new phase “cognitive automation.” “Automation will continue everywhere, but it’s probably going to be a very new feeling for the cognitive workers that are suddenly going to experience it on a much larger scale,” he says.
Tech companies have the option of shaping the future of automation, perhaps away from job-destroying to job-enhancing technology.
“What is needed is a new direction for the tech industry,” writes Daron Acemoglu, another MIT economist, in an email. “This new direction should prioritize more worker-friendly and citizen-friendly technologies.” For example, he writes, it should try to improve the productivity and experience of workers in workplaces, and protect and empower users, rather than “incessantly” collecting their data and using that for digital ads or as inputs into new AI programs. However, he continues, “I don’t see any evidence that there is a realization that the previous direction was deficient (harmful to society at large and failing to deliver the promised huge returns).”
Back at the Lotus Test Kitchen in Boston, Mr. Xie marvels at some of the applicants he’s now getting for the delivery jobs he needs to fill. “It’s these young students who have just gotten out of college, one with a master’s degree,” he says, who are applying for positions that only pay $18 an hour.
Across the street at Starry, the future looks uncertain. Failing to get the investment needed to rapidly expand its fixed wireless internet service, the company had to lay off half its workers last fall and more of them last week. But the confidence in tech remains. Says a company spokesperson in an email: “If history is a guide, there will be a rebound and the tech industry will continue to deliver a lot of economic growth and value.”