Many employees can’t quite put it into words, but they recognize a certain moment. The salary increased. The title of the position was altered. Nevertheless, there seems to be less space to breathe at the end of the month than there was five years ago. In a very real sense, the math isn’t correct, which is why it doesn’t feel right.
The Workforce Information Council’s recent findings provide a clear explanation of the issue. The nominal wage growth that American workers have accrued over the past ten years has been largely erased by inflation, which has been hotter and longer than most economists had anticipated. According to the council’s analysis, a sizable portion of the workforce is making no more money now than they did ten years ago in terms of real purchasing power, which is the kind that actually buys groceries, covers rent, and fills a gas tank. Some people are making less money.
The scale of this dynamic feels different now, even though it isn’t new. Wages and productivity increased roughly in tandem for the majority of the post-war period. Employees were paid more and produced more. Early in the 1970s, that relationship began to deteriorate, and for the next fifty years or so, the gap grew. Research from the Economic Policy Institute shows that by 2013, productivity had increased by 74% since 1973, but the average worker’s pay had only increased by 9%. Employees were producing far more value than they were earning.
A new blow was added to that already uncomfortable story over the past few years. Wages did increase, particularly in certain industries. Employers increased wages to draw and keep workers during the labor market tightening that followed the pandemic disruptions. For a moment, it seemed as though things might be changing. That window might have always been smaller than it looked.
At their most recent peak, U.S. wages were rising at a rate of about 4% annually. The Consumer Price Index indicated that inflation was at least 5.4%. Even though the difference seemed tiny in percentage terms, it grew rapidly. According to one calculation, four months of high inflation can effectively erase a full year’s worth of wage gains. Workers lost money at utility bills, pharmacy windows, and checkout counters.
There is a propensity to present this as a straightforward mathematical issue: real wages decline, inflation rises, and the situation eventually corrects itself. However, something crucial is overlooked in that framing. Over time, the losses for middle-class households accumulate in ways that are not entirely reversible. By 2007, there was a nearly $18,000 disparity per household between the actual growth in middle-class income since 1979 and the growth that would have occurred in a more equitable economy. It is not an abstraction. That includes unpaid college tuition, postponed home repairs, and unpaid retirement contributions.
It is more difficult to ignore the distributional aspect of all of this. Between 1979 and 2013, wages at the top of the income scale increased by about 138%. That figure was 15% for the lowest 90% of earners. That imbalance wasn’t created by the recent inflation episode, but it made the daily effects more severe for workers with the least amount of buffer. A period of inflation is manageable for high earners. Paycheck-to-paycheck people are unable to.
It’s important to remember that stagnation is measured differently. Some economists contend that alternative metrics, such as the Personal Consumption Expenditure index, provide a somewhat less dire picture of the inflation burden on average households and that the CPI overstates this burden. There’s a legitimate argument there. It is difficult to contest the overall trend of the results, even after accounting for measurement uncertainty: wage growth has not kept up with the rising cost of living for a significant portion of American workers over any meaningful time horizon.
The results of the Workforce Information Council add a level of grounded, contemporary specificity to this continuing discussion. This is neither a statistical debate regarding index methodology nor a historical retrospective of the 1970s. It is an accounting of workers’ actual situation in the present tense. Additionally, their current position is either slightly behind or roughly where they were prior to the raises.
Policy responses to this reality are still up for debate. The traditional levers include raising the minimum wage, expanding collective bargaining, protecting overtime, and tightening labor markets. Others contend that rather than more guarantees, what’s needed is a redesign of the safety net that promotes entrepreneurship and job mobility. Both discussions are worthwhile.
Whether the issue is genuine is no longer worth disputing. The pay increased. Purchasing power did not follow. Quietly and steadily, ten years of nominal gains have been neutralized. As is typically the case, employees sensed it before the data verified it.
