Despite higher wages, inflation gave the average worker a 2.4% pay cut last year

Personal finance

A San Francisco grocery store.
David Paul Morris/Bloomberg via Getty Images

Inflation is taking a big bite out of workers’ paychecks, eroding many of the raises businesses have offered to attract and keep employees in a hot job market.

But strong wage growth in certain sectors, such as hotels and restaurants, has eclipsed those consumer price leaps — at least for now.

The biggest raises have come in some of the country’s lowest-paying jobs, helping insulate cash-strapped households from rising prices for staples like food.

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The Consumer Price Index, a key inflation measure, jumped 7% in December from a year ago, the fastest rate since June 1982, the U.S. Department of Labor said Wednesday.

The index accounts for costs across many goods and services, from alcohol to fruit, airfare, firewood, hospital services and musical instruments. On average, a consumer who paid $100 a year ago would pay $107 today.

Average pay also jumped significantly in 2021 — to more than $31 an hour, a 4.7% annual increase, the Labor Department reported Friday.

Despite that pay bump, higher consumer prices ate into household budgets. In effect, the average worker got a 2.4% pay cut last year, according to seasonally adjusted data published by the Labor Department.

“In what was the best year for wage growth that we have seen in many, many years, it still comes up as a loss for many households,” said Greg McBride, chief financial analyst for Bankrate. “Their expenses increased even faster and chewed up all of the benefit of whatever pay raise they had seen.”

Who’s outpacing inflation?

So-called real earnings (wages minus inflation) fluctuate widely from household to household. The experience will differ based on consumers’ jobs and what they buy.

For example, rank-and-file workers in leisure and hospitality — the lowest-paying sector of the U.S. economy — got a nearly 16% raise in 2021, to $16.97 an hour. That means the average employee at a bar, restaurants and hotel saw pay rise more than two times faster than inflation, amounting to a net 9% increase in annual pay.

Similarly, rank-and-file workers in transportation and warehousing saw their annual pay rise 8.4%, to $25.04 an hour in December. Retail workers got a 7% increase to $19.20. These either exceeded or matched inflation.

The typical experience is [that] inflation has likely taken a significant bite out of workers’ paychecks.
Daniel Zhao
senior economist at Glassdoor

Employers have had difficulty finding workers to fill jobs in these sectors, according to Daniel Zhao, a senior economist at Glassdoor, a career site.

High demand for labor (amid a near-record number of job openings) has pushed businesses to raise pay. The wages also reflect realities of the pandemic — workers may want a bigger paycheck to compensate for the higher risk accompanying these front-line roles, Zhao said.

While wage gains have outstripped inflation for some lower earners, that doesn’t seem to be the experience for most households, Zhao added.

“The typical experience is [that] inflation has likely taken a significant bite out of workers’ paychecks,” he said.

Jason Furman, an economist at Harvard University and former economic advisor to President Barack Obama, found that wage growth among the bottom 25% of earners outpaced consumer prices in the two years through November 2021. The remainder of workers have gotten a new pay cut, he said.

While average pay at the lower end has outpaced inflation, that doesn’t necessarily mean the jobs are paying a living wage, according to a Brookings Institution analysis of recent pay raises.

“Headlines about rising wages for frontline workers — even rising real wages — often obscure the reality that wage levels are still low,” the analysis said. “In today’s inflationary environment, even as wages rise, so does the minimal threshold for an acceptable wage level.”

Consumer buying

d3sign | Moment | Getty Images

Prices gains have occurred across a broad swath of goods, but the increases aren’t equally distributed.

Americans who use public transit may have dodged some of the year’s biggest jump in costs — in gasoline and used cars and trucks, for example. (They jumped 50% and 37%, respectively.)

Staples like rent and groceries are harder to avoid. (Their costs were up 3.3% and 6.5% on the year, respectively.) Consumers may change buying behavior to reduce the budget sting, perhaps substituting chicken or fish for beef (which jumped 19%), for instance.

An increase in annual rent may prove longer-lasting than in other areas, according to economists. Even a small increase in percentage terms can quickly erode any paycheck gains for lower-earning renters, McBride said.

It’s unclear how long inflation or wage gains will last. Many economists believe both will start to taper in 2022, if supply bottlenecks ease (helping to reduce prices) and virus cases wane (increasing the supply of workers).

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