Before Americans congratulate themselves on securing higher wages, they should realize that inflation is taking out their gains. In fact, compensation rates are now lower compared to December 2019.
Companies Are Now Offering Higher Wages
Companies across American are offering higher wages to attract new workers and retain existing employees. With demand rising again, they’ll need all hands on deck if they plan to return productivity back to pre-pandemic levels.
However, rising inflation is putting a damper on higher wages. Even as American workers take home bigger pay, higher costs of goods and services are taking a bigger bite out of their budgets.
According to an analysis by Harvard economics professor Jason Furman, compensation is now lower than it was in December 2019. Furman adjusted wages for inflation to arrive at the number.
Employment Cost Index
The Employment Cost Index measures wages and salaries and adds benefits such as health, retirement, and others. During the last quarter, Furman said that the ECI is now 2% below pre-pandemic levels. Note that wages and salaries grow at a faster pace compared to benefits. “The hot economy is heating prices more than it is heating wages,” he added.
Unlike other measurements, the ECI index is not subject to distortions like average hourly earnings. Currently, the average hourly earnings metric is going back and forth. Many lower-wage workers lost their jobs earlier and are now returning to work.
Inflation is Outpacing Wage Increases
Compensation rose 2.8% between March and June, even with the relatively high unemployment rate. This reflects a tight labor market that has more jobs than workers. In fact, total job openings posted a record at 10.1 million in June, per data from the Bureau of Labor Statistics.
Despite the record opening, around 8.7 million Americans, whether unemployed or working part-time, are still looking for full-time jobs.
However, inflation is running at a faster pace. Food and fuel costs increased due to distortions in the supply chain. House prices went up due to soaring demand and costlier materials, and car prices (whether brand new or secondhand) are also rising.
The consumer price index rose 0.9% in June and averaged 5.4% over the past 12 months. These are the largest recorded gains since 2008.
Even as Americans winced from higher prices, many believe these are short-term. The higher salaries also cushioned them from feeling the impact, according to Richard Curtin, a BLS chief economist.
How Long Will Inflation Last?
Experts and administration officials disagree on how long inflation will linger. President Joe Biden and the Federal Reserve insist that higher prices won’t turn into a long-term problem. However, many economists think that inflation is far from over.
If ever inflation does start to ease, American workers can enjoy their higher wages. “To the extent that inflation is transitory, this dip in real wages is also transitory,” said Tim Duy, chief US economist at SGH Macro Advisors.
Watch the WXYZ TV Detroit video news reporting that Experts say inflation tied to economy reopening:
Do you agree that wages, while higher now, are offset by higher prices? In addition, do you think inflation is transitory, and that American workers will enjoy their pay increases long term?
Let us know what you think about the relationship between pay increases and inflation rates. Share your comments below.