Inflation is wiping out many American workers’ gains in the form of wage increases. Now, even more, people are struggling to make ends meet even after receiving pay raises over the last year.
Wage Increases Wiped Out By Inflation
After enduring years of stagnant wage growth, American workers began receiving modest pay increases in the past two years.
The pandemic, along with infusions of government stimulus and labor shortages, gave power to the US worker. At last, unions and workers now have a place back in the negotiating table.
However, that development became short-lived. The same economic revival that raised workers is also pushing inflation rates higher.
Instead of gaining more spending power, American workers now have to pay more for the same items. In fact, average worker wages rose 4.7% in 2021. However, when adjusted for inflation, overall wages fell by 2.4%. This is according to the US Labor Department.
Wages from Leisure and Industry Sector Outpaced Inflation
Only the hospitality and leisure industry sector managed to escape the effects of inflation on wages. This industry traditionally pays its workers the lowest in the industry. This time, however, workers received a 14% average raise from $17 an hour to more than $19.50.
Despite the increases, which can run to as high as 33%, many still say they’re struggling to make ends meet. Many said they still need to take second jobs to keep up with rising costs.
Even more, workers are bracing for the arrival of May. This is when student loan payments, suspended for the past two years, will make a comeback.
Inflation Rose to Its Highest Levels in 40 Years
Last year, inflation rose by more than 7%, the most gains in forty years. Disruptions in the supply chain plus a shortage of workers, plus growing US consumer demand, all helped prices go higher.
In fact, gas prices are 50% compared to 2020 levels. Meanwhile, food prices went up by more than 13% per the US Consumer Price Index.
Consequently, inflation and wage growth often clash. Many economists see wage growth as a consequence of a strong, rebounding economy. Higher wages are also a result of tightening competition for workers.
Unchecked, however, high inflation and high wages can push each one higher into an endless spiral. This is what happened during the late 1970s and early 1980s. Once each side starts pushing up, inflation will start going out of control.
Federal Reserve Doesn’t See Wage Price Spiral Yet
According to Federal Reserve Chairman Jerome Powell, the agency has yet to see evidence of the wage-price spiral. He did assure the public that the Fed continues to monitor the trends closely. The Fed will also push through by periodically increasing interest rates this year.
Meanwhile, the big question remains: is the overall wage increase a one-time growth activity, or is it a start of more sustained wage growth?
Nick Bunker, an economist at Indeed Hiring Lab, says the outlook for 2022 remains unclear. “How much of deceleration will we see in wage growth this year? Gains were a result of the economic reopening, where a surge of demand followed the rollout of vaccines and economic stimulus.
The Wage Increase Domino Started With Lowest-Earning Workers
Low wage earners began feeling the effects of the fastest wage growth rates in years. This is mainly due to the fact that many cities, states, and companies raised their minimum wages.
Economists now see the same will happen to white-collar industries. US businesses plan to raise wages by 3.9% this 2022, according to ADP chief economist Nela Richardson. This is the fastest rate of wage increases since 2008.
Richardson added that the talent is now growing. “We’re starting to see wage pressures now is in professional business services, finance, and information technology”.
Already, wages are growing fastest on the West Coast. She added that those workers will also likely receive more non-cash compensation such as stock options.
Watch the CBS News video reporting that Americans continue to struggle with inflation despite economic growth:
Do you foresee wages and prices clashing to push inflation further up? What do you think is the solution to prevent runaway inflation?
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