What’s Your Raise Really Worth? Inflation Has Something to Say About It.
For the lowest-paid Americans, real wages—adjusted for rising prices—fell 0.5% in August from a year earlier; ‘I’m just kind of scraping by
This should be the best of times for low-wage workers, as pandemic-induced labor shortagesforce employers to sharply raise pay. Yet for many, it doesn’t feel that way, because those same disruptions have pushed inflation to near its highest rate in over a decade.
Troy Sutton, age 61, lost a job as a custodian at the start of the pandemic in 2020 that paid $12 an hour, and he spent more than a year unemployed. This past summer, he landed a job as a custodian at the University of Pennsylvania he said pays $18 or more an hour.
But Mr. Sutton’s water, electricity and cable bills are higher than a year ago, he said. He is shelling out more for veterinary checkups and dog food for his two Chihuahuas, Princess and Precious. At the supermarket near Mr. Sutton’s house in Philadelphia, eggs climbed from about $2 a dozen in 2019 to $3.69 during the pandemic.
He and his wife started shopping more at supermarket chain Aldi this year, where many groceries are cheaper, he said. But the longer drive and higher gas prices have eaten up some of the savings. He has also cut out brand-name cereals, rice, oatmeal, ketchup and mustard.
“I’m making more money. I should be able to see it,” Mr. Sutton said. “But I don’t see it because I’m paying more money for stuff now.”
Overall consumer prices rose 5.3% in Augustfrom a year earlier, a slightly slower pace than in June and July but still near a 13-year high, said the Labor Department.
That means that for the lowest-earning tier of workers, “real” wages—pay adjusted for inflation—fell 0.5% in August from a year earlier, according to data from the Atlanta Fed and the Labor Department. That contrasts with 2.1% annual growth in the two years before the pandemic.
The combination of strong wage gains and high inflation reflects the unusual nature of the current economic recovery. State reopenings, vaccinations and fiscal stimulus had until recent weeks fueled a powerful surge in demand, in particular for in-person services such as dining and travel that consumers shunned for most of the pandemic and that skew toward low-pay jobs.
Companies couldn’t hire fast enough and boosted pay to attract workers and retain those they had. Employees in typically low-paying jobssuch as those in restaurants, airports and hotels reaped the biggest wage gains. Annual wage growth for the 25% lowest-earning workers was running at 4.8% in August, according to the Federal Reserve Bank of Atlanta. That was the highest rate of growth since 2002, and slightly above the 4.7% reached in the months before the pandemic, when unemployment hit a historically low 3.5%. Annual wage growth for the highest-earning workers, by comparison, was 2.8% in August.
At the same time, the gush of spending collided with pandemic-related shortages and bottlenecks, causing prices for many goods and services to soar this summer. A shortage of semiconductors for new vehicles, for instance, sent prices up sharply for used and rental vehicles. Supply-chain issues have persisted, keeping upward pressure on prices.
Whether this squeeze on workers’ real incomes persists or reverses depends on the path of both wages and prices. Most economists expect inflation to retreat somewhat, as supply-chain disruptions abate and demand cools from its pace fueled by stimulus and reopening.
Economists surveyed by The Wall Street Journalin July projected inflation to clock in at 4.1% at the end of 2021 before cooling to 2.5% in 2022 and 2.45% in 2023. That would still leave inflation well elevated compared with the average annual inflation rate of 1.8% logged in the decade preceding the pandemic.
Mr. Sutton landed a custodian job paying $18 or more an hour, up from $12 hourly at the job he lost last year.
Bargaining power
But economists also expect factors that boosted low-end wages in the past year to fade as school closures, fear of Covid-19 and federal income support—all of which appear to have played some role keeping people out of the workforce—abate.
As the labor shortage eases, workers will likely lose some of the bargaining power they had gained, said Josh Bivens, director of research at the Economic Policy Institute, a left-leaning think tank. “In the long run, I don’t see how that source of clout is viable,” he said. “People need to work to live, and this goes double for lower-wage families.”
Future Covid-19 outbreaks could weigh on lower-wage workers’ pay gains, as disruptions from the Delta variant have already done, said Diane Swonk, chief economist at accounting firm Grant Thornton. The pace of hiring slowed in August, Labor Department data show, in part due to restaurants and stores cutting staff.
So even if inflation does moderate, as expected, cooling wage growth means real incomes for low-end workers may not grow that rapidly.
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