Wages are rising, but inflation may have given workers a 2% pay cut

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Workers’ hourly wages rose to the fastest clip in more than a decade in June. However, some of them saw that these gains were being wiped out by high inflation.

“Real wages” – a measure of income after taking into account the cost of goods and services that people buy – have fallen by an average of almost 2% over the past month compared to 2020. Senate Republicans said Wednesday that Americans will receive a pay cut as a result.

“The staple foods of American life are growing exponentially,” said Senator Tim Scott, RS.C., citing examples such as higher prices for gasoline, laundry, airfare, moving costs, hotels, bacon, and televisions.

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The argument that inflation is eating up rising wages is true, according to economists. Still, there are many nuances, they said.

Whether or not a consumer gets a pay cut depends on their individual income and the things they buy.

“When prices grow faster than wages, people get inflation-adjusted wage cuts,” said Michael Strain, director of economic studies at the American Enterprise Institute, a right-wing think tank. “Ultimately, it varies dramatically with each individual.”

Plus, inflation has been volatile and could prove temporary – meaning a decline in purchasing power could be short-lived, economists said.

Inflation and wage growth

The average hourly wage rose 3.6% to $ 30.40 in June from the same month in 2020. That’s the biggest increase since January 2009, according to data from the Economic Policy Institute.

Meanwhile, the consumer price index, a measure of inflation, rose 5.4% over the same period – its strongest since August 2008.

Taken together, this equates to an average loss of purchasing power of 1.7% when you factor in seasonal adjustments, according to the Bureau of Labor Statistics.

“Inflation is a tax,” said William Foster, vice president of Moody’s Investors Service. “That’s the best way to think about it.”

Inflation is having the biggest impact on low-income earners who spend more of their average dollar on gasoline, groceries and other items that may have prices rising, Foster said. Wealthier individuals, who tend to hold more financial assets like stocks or homes, might be better able to offset the effects of inflation, he added.

But not everyone got a cut in pay as a result. The 5.4% rise in annual inflation is the average for many items – and households don’t necessarily buy the items that get much more expensive.

For example, the metric includes used cars and trucks prices, which are up about 45% from June 2020 – the biggest change since records began. This price shock wouldn’t hit anyone’s wallet unless they bought a used car.

Gasoline prices have also increased by 45%. These additional costs would be borne by the drivers, but perhaps not by the city dwellers who use public transport.

In comparison, food prices rose by only 2.4% over the same period and are thus below the general inflation rate.

Consumer behavior

Nor does the consumer price index take into account changes in consumer behavior, who may change their purchases to avoid these higher costs.

For example, people could switch from beef to chicken to save money or postpone buying a car until prices drop.

“People respond to price changes by shifting their consumption,” says Noah Williams, an economics professor at the University of Wisconsin-Madison and an adjunct fellow at the Manhattan Institute.

The consumer spending price index, another measure of inflation, takes these shifts into account. The Bureau of Economic Analysis has not yet released the number for June. However, in May, the PCE index was 1.1 percentage points below the annual value of the consumer price index (3.9% versus 5%) – suggesting that consumers were buying cheaper goods.

However, according to Casey Mulligan, an economics professor at the University of Chicago, these shifts are still costing, if not explicit, to consumers.

“They are trying to minimize the evils, but they are both evils,” said Mulligan, who served as chief economist to the White House economic adviser during the Trump administration.

Distortions

According to economists, there is also reason to be cautious about overinterpreting inflation and wage figures as the US economy recovers from the Covid-19 pandemic.

This is due to the economic distortions caused by the virus. For example, consumer prices fell at the beginning of the pandemic. Of course, if you compare prices today with lower prices a year ago, inflation data will look high.

Similarly, a disproportionate number of layoffs among low-wage workers during the pandemic can skew wage data. In April 2020, for example, despite mass layoffs, the average hourly wage rose 8% (the highest ever recorded) as more high earners remained in employment.

The same thing can happen now, but vice versa. When the economy recovers and low-wage workers are reinstated, median incomes can appear suppressed.

According to Susan Houseman, director of research at the WE Upjohn Institute for Employment Research, it could be a little misleading to suggest a pay cut to workers.

“[The composition of the workforce] changes especially during downturns and recoveries, so care must be taken when interpreting this data, “she said.

Temporary or not?

It is unclear whether economists believe that higher consumer prices and wages are temporary or of a longer duration.

However, at least some of the inflation could be explained by likely short-term dynamics such as supply shortages and a surge in demand as consumers wake up from a pandemic-induced hibernation, they said.

For example, recent high gas prices have been partly caused by the failure of major oil-producing countries to agree to increase oil supplies in early July, according to AAA. And a shortage of microchips has caused car prices to rise.

However, some expect inflation to persist.

“Inflation will not be temporary,” Mohammed El-Erian, Allianz SE’s chief economic advisor, told Bloomberg TV on Friday. “I have a whole list of companies that have announced price increases that have told us that they expect more price increases and that they expect them to stay,” he added.

According to the Ministry of Labor, wages appear to have risen in recent months amid increasing demand for labor. Raising wages can last longer than high inflation because companies often don’t cut wages after raising them, Houseman said.

“We don’t usually give people wage cuts,” she said. “Employers usually don’t do that.

“So in that sense they’re stickier.”

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