US Workers’ Real Wages on the Rise as Inflation Subsides
Minneapolis, CNN — For the past two years, American workers have been feeling the pinch as inflation eroded their paychecks. However, recent data shows that the tide may be turning as inflation starts to wane.
According to the Bureau of Labor Statistics, in June, for the first time in 26 months, US workers’ real weekly earnings (adjusted for inflation) grew on an annual basis. Real weekly wages saw a 0.6% increase last month, just slightly below the 0.7% gain seen in February 2020. Additionally, June marked the second consecutive month of year-over-year real hourly wage growth, a positive sign for workers.
“The big problem for most consumers is when wage increases do not keep pace with inflation, then we lose real purchasing power,” said William Ferguson, an economics professor at Grinnell College. “And that’s actually what hurts people.”
While this increase in real wages is long overdue, it comes at a critical juncture in the economy and the Federal Reserve’s battle against inflation. The central bank has been focused on curbing demand and has expressed concerns about how wage growth could further fuel inflationary pressures.
Alternatively, if the labor market cools down, it could dampen the recent wage growth, making it short-lived. “If inflation is moderate and the labor market is very strong, it’s a reason for vigilance, but it’s not a reason on its own to continue hiking,” said Alex Pelle, an economist at Mizuho Securities.
The Federal Reserve is currently adopting a wait-and-see approach, evaluating the effects of previous rate hikes. However, markets expect the central bank to continue with a quarter-point increase at its upcoming meeting.
Fears of a “wage-price spiral” have made wage growth a contentious issue, as rising wages and prices fuel each other. However, recent research suggests that wage gains have had limited effects on inflation.
“What keeps a floor on inflation that’s above the Fed’s target of 2% is the fact that wage gains will fuel spending,” said Pelle. “But let’s see how it evolves over time. I don’t want to jump the gun and say absolutely that this is something that the Fed needs crushed.”
The June jobs report indicated a potential trend that could hinder wage gains. The number of people employed part-time for economic reasons increased, reflecting people whose work hours were cut due to business conditions.
Nevertheless, broader labor market trends, including hiring activity and businesses’ budgets, are favorable for workers to maintain these real wage gains. Job growth, while slowing from its peak, remains strong, and supply-side inflation has cooled, giving firms more flexibility to compensate their employees.
“For the most part, this is still a tight labor market, still very low unemployment, still healthy business activity in lots and lots of industries where businesses have little choice but to staff up or at least maintain the staff they have,” said Julia Pollak, chief economist with ZipRecruiter.
As the economy continues to recover from the pandemic, workers are asserting their demands and responding to years of negative real wages through labor strikes. With the easing of inflation, there is hope for sustained wage growth in the future.