New economic research from the University of Chicago and ADP reveals that from February 2021 to June 2022, the real wages, or purchasing power, of the average American's paycheck dropped by over 4%. This decline proved lasting for many, with the analysis indicating that 37% of workers examined earned less in inflation-adjusted terms in December 2024 than they did four years prior. These losses were never made up, and now workers are facing a similar situation.
The current bout of inflation, reignited by the Iran war and higher oil and gasoline prices, pushed the Consumer Price Index to an annual pace of 3.4% in July. This outpaced the 3.2% increase in workers' hourly wages during the same period, leading to another decline in real wages. Erik Hurst, a labor economist and coauthor of the paper, noted that the "long shadow" of the pandemic's high inflation still impacts workers, contributing to diminished consumer sentiment. Consumer sentiment dipped about 8% in August, reversing two months of improvement.
The research, co-authored by Erik Hurst and Christina Patterson, highlighted that prior to the pandemic, workers typically saw pay raises of 2% to 4%. However, when inflation hit a 40-year high of 9.1% in June 2021, companies largely maintained their standard pay hikes. This failure to align pay raises with inflation resulted in significant real wage losses for many workers, effectively creating an "inflation transfer" where the burden of higher prices shifted from corporations to employees. Hurst explained that when real wages are low, well-being and consumer sentiment also decline, despite low unemployment and relatively high employment.
The study found that 43% of workers continuously employed at the same firm from December 2020 through December 2024 ended the period with lower real wages. For those who experienced a decline, the mean loss was roughly 9%, and the median loss was about 7%. Even when accounting for job-changers, 37% of all workers saw their real wages decline over this four-year period. This indicates that nominal wage growth did not keep pace with inflation for a substantial portion of the workforce, contributing to higher firm profits and lower real wages.
