Over the past three years, low workers have achieved groundbreaking wage gains, even after accounting for inflation. This marks a reversal of the previous trend, where upper-income workers were more advanced, while laborers' pay remained stagnant for over four decades. Changes in the labor market structure and the government's policies that aided the economy during the pandemic spurred these gains. Due to the resulting shortage of workers, the lowest earners, with an average hourly pay of $12.50, experienced an approximately 6% pay increase from 2020 to 2022, surpassing what low-wage workers received during President Barack Obama's administration after the Great Recession. Conversely, price hikes have diminished raises for the highest-earning employees, leading to a nearly 5% drop in their inflation-adjusted income over the last two years. A new study revealed that this led to a quarter of the growth of the 40-year gap between higher-income workers and lower-income ones vanishing in just a few years. However, these gains are now in peril as the government plans to end pandemic-era spending and the Federal Reserve slows down the economy since wage increases for all workers have risen too quickly for inflation. The resulting deceleration would hurt low-wage workers more, implying a significant turning point for the government and its allies in Congress. The Biden government has been mostly supportive of the Fed's moves, while progressive lawmakers and economists question whether low-wage workers' progress is being sacrificed to ensure price stability. This tension is likely to persist over the next few months as the Biden administration fine-tunes its economic message for 2024. At this point, there is statistical evidence to support either portraying the economy as a work-in-progress, still recovering from the pandemic's shock, or stressing the gains for low-income workers that counterbalance the long-established narrative of benefits exclusively for the wealthy. Recent data shows that service industry workers extended more considerable bargaining power to push for better wages and benefits as they moved into better-paying jobs, leaving their previous positions open for lower-paid workers. Unions like UNITE HERE saw power gains during negotiations, pointing to extensive wage wins across the country. Wage and price rates have cooled since aggressive interest rate hikes by the Fed in both Donald Trump's last ten months and Joe Biden's first 14 months in office.
The Labor Department's Employer Costs for Employee Compensation index reveals that low-wage workers in the 10th percentile - who earn an average of $12.50 per hour - have seen a remarkable surge in their inflation-adjusted income: a substantial 5.7 percent increase from March 2020 to March 2022. This stands out in stark contrast with the mere 3.9 percent raise that this group experienced from 2009 to 2017, which averages out to less than a half-point gain each year. Even though the job market was in excellent shape between 2017 and 2019, the pay hike for this cohort was only 3.1 percent after accounting for inflation, which was relatively low at the time. The University of Massachusetts Amherst Professor Arin Dube, who looked through Census Bureau data with two other researchers, clarified that a significant revamping of the low-wage market has taken place in the post-pandemic era. Dube and his team discovered that the benefits of this labor market restructuring have been especially advantageous for individuals under 40 who do not have a college degree, with the period between January 2020 and September 2022 witnessing considerable gains. This implies that younger generations are likely to experience greater opportunities than millennials who joined the labor force after the Great Recession, grappling with low pay that depressed their potential future earnings. Dube explained that this raises the likelihood that people will achieve a decent wage earlier in their lives.
The Fed's campaign to combat growing inflation is now centered around slowing the rise of worker pay. While costs for long-lasting items such as used vehicles and furniture have subsided since the Fed began increasing interest rates a year ago, rent hikes have indicated signs of decreasing, and inflation is surging for sectors that incur substantial labor expenses within their services. During the 12 months ending in April, the average hourly earnings of private industry staff elevated by a substantial 4.4 percent in terms that are not adjusted for inflation. Fed officials are concerned that swift wage growth, while not the cause of inflation, could result in even faster price increases, thereby rendering higher pay mostly meaningless. This has caused the Fed to maintain an awkward position, arguing that having people's income better match the cost of living's rising expense isn't advantageous for the overall economy. Fed Chairman Powell has stated that robust wage growth is a positive development, but for it to be sustainable, it must align with 2 percent inflation. Powell and the Fed are weathering incessant criticism from the progressive left, spearheaded by Senator Elizabeth Warren (D-MA), who has denounced rate hikes on national television programs, in interviews, and in Senate speeches. A coalition of progressives around Warren's argument believes that the central bank's ability to fight inflation caused by pandemic-related supply shortages is limited and that higher borrowing costs are ultimately scapegoating workers with unclear benefits.
Representative Ayanna Pressley, another Massachusetts Democrat, expressed to POLITICO that the Fed's rate hikes were "reckless," and groups like progressive think tank Groundwork Collaborative warn that a recession and increased unemployment, which are anticipated, are avoidable. Unemployment rates are at their lowest point since the Korean War, and there are high job vacancies. Washington policymakers are waiting to see how long the labor market can withstand the central bank's battle against inflation. In 2024, how the economy will react to the Biden administration remains a big question. Though Fed staff economists anticipate a mild recession later in the year, with recovery beginning next year, the Biden administration contends that they have taken actions that will sustain workers in the long term, despite the Fed's recent decisions. Heather Boushey, a member of the White House Council of Economic Advisers, claims that the president has aimed to pursue policies that increase the economy's productivity, such as investing in infrastructure and clean energy, to help sustain wage gains for lower-earning workers.
Sustainably increasing wages over the long term hinges on improving productivity; however, productivity gains have been underperforming for more than a decade. Strengthening worker output through investments can create an advantageous situation where businesses can effectively offer goods and services, and people have the means to purchase what consumers produce. Nevertheless, determining if Biden's legislative proposals are affecting this metric may take years. Heather Boushey stated that, during his presidential campaign, Biden identified economic inequality as a severe problem, particularly regarding geography and race, and emphasized the necessity of building the economy from the bottom up and the middle out. Boushey added that holding down a job was how most Americans garnered their income and that the administration is empowering workers as much as possible. In the short term, lower-income Americans may struggle to benefit from wage growth, according to Tobin Marcus, a senior U.S. policy and political strategist at Evercore ISI, who previously worked as an adviser to Biden.
Polling results reveal that a significant portion of voters feel as though we are in a recession, indicating that they believe there is a general problem with the economy. It's challenging for the administration to receive recognition for genuine wage growth for lower-income workers if it's within the context of an economy where people believe something is wrong. Furthermore, many of these individuals have witnessed their government aid reduce even as their salaries have increased over time. During the pandemic, several households received a significant boost from stimulus checks, augmented unemployment benefits, and increased child tax credit payments, which have all come to an end. A yearly survey issued by the Fed on Monday showed a 5 percent decline in the number of individuals who claimed they were doing reasonably well financially between late 2021 and late 2022, even though the poorest workers reported improved financial health than they did before Covid. Tobin Marcus explained that when people discuss inflation, they are expressing the growing difficulty of affording necessities rather than price level fluctuations. He further explained that to the extent that the pandemic-related control measures are reducing alongside genuine wage gains, they are somewhat counterbalancing each other.
Similar to other consumers,-income workers have expressed uncertainty regarding the larger economic situation through polls. However, some individuals who have seen a rise in their pay in recent years have mentioned that their lives have improved considerably. Bunny White, who works as a cashier at professional sports venues in New Orleans, is 65 years old and was involved in a union-crafting movement at her job. In early April, her efforts were rewarded as she secured her first contract. As a result, she revealed that her hourly rate would increase from $12.50 to $16. To pay her expenses, she has a second job with a private catering firm and also serves occasionally as a Uber or Lyft driver or door-to-door meal delivery person with DoorDash. She now feels she has greater flexibility with her time.
In a recent conversation with POLITICO, Bunny White expressed her desire to establish a financial cushion and live life on her terms. She shared that she did not want to merely pay her bills with her earnings but have money to enjoy life. She believes that with future raises and promotions, she may be able to achieve that goal. White had recently taken a trip to Tennessee to visit colleges with her granddaughter, who is considering a degree and a job in the hospitality industry. According to White, the pay scale now available could support people's livelihoods, such as 17 or 18-year-olds. These opportunities might prevent crime and offer more options other than going to jail. Some of the most significant income gains were witnessed at hotels and restaurants, which wrestled to find employees as the economy reopened after being hit hard by the pandemic. The national average hotel wage this year has increased by 25% to over $23 per hour, compared to $18.74 in 2020. At the Diplomat Beach Resort in Miami, Ines Santisteban, a housekeeper, saw her hourly income rise to $19.30 from $16.30 following the acceptance of a new labor agreement. By the end of the contract, her hourly rate will have increased by $5.25. Through a UNITE HERE-affiliated interpreter, Santisteban, who originated from Colombia more than two decades ago, stated that she has two income streams and can support her household due to this wage increase. Though she might not be able to afford luxury items, the rise enables her to maintain her house, stay afloat, and pay bills.
According to Chip Rogers, who leads the American Hotel and Lodging Association, competition to recruit experienced hotel employees has been aggressive in cities where occupancy levels have returned to pre-pandemic levels. He noted that frontline staff is paid a significantly higher wage. However, workers who spoke with POLITICO expressed that their wage gains have only aided them in paying for fundamental expenses, with little ability to surpass them. Nathan Halim-Saputra, a 26-year-old environmental lab analyst from Chicago, claims his income remained practically unaltered between his college graduation in 2019 and 2021. Still, between October 2021 and April 2023, his hourly rate increased from $15.50 to $18. While the increase has helped him repay his student loan, it is insufficient for him to move out of a shared housing space. He mentioned that unforeseen circumstances, such as needed medical treatment costing roughly $100-200 or vehicle maintenance totaling $500-1000, consume any savings he previously expected to accrue. Furthermore, Halim-Saputra shared that the rising cost of gas and groceries makes it challenging for him to save for a better future.
As the debate persists about the relationship between wage growth and inflation, consumers continue to feel the financial impact of inflationary pressures. The consumer price index shows a 4.9 percent increase in the cost of living during the 12 months ending in April, which is substantially higher than what the Federal Reserve wishes to see. For median-wage earners, the pay increases they've earned have been offset by the rising cost of living, emphasizing why the central bank is willing to prioritize the latter over the preceding. The lowest-paid employees, who have seen substantial raises, are still unable to benefit entirely from these gains due to inflation, with many being forced into debt to cover basic expenses. Katrin Kark, the director of workforce innovations at Local Initiatives Support Corp., shared her concern that these modest increases could erode even further if the labor market continues to worsen. Additionally, supporters of government economic aid, particularly the $1.9 trillion American Rescue Plan, regard the thriving job market as an endorsement of that decision, especially when considering how long it took employees to recover after the 2008 financial crisis. Skanda Amarnath, the director of the worker advocacy group Employ America, expressed that an economy marred by inflationary fears keeps a lot of individuals from entering the labor market. He believes it's better to accelerate the economy to reach full employment since the experience has shown sluggish recovery periods following recessions.
According to the latest government data on racial employment gaps, for the first time, Black men have the same likelihood of participating in the labor force as white men. Skanda Amarnath acknowledged there will always be an "inflationary speed limit," highlighting the necessity of instilling more resilience into supply chains to avoid jarring price spikes during surges in demand, as happened in the aftermath of Covid. "But fiscal policy functioned in terms of achieving a speedy recovery," he explained. However, not everyone agrees, particularly more centrist economists who argued that the early 2021 funding package was too significant and would instigate painful price increases. They contend that there are few alternatives to raising interest rates to prevent inflation from spiraling out of control. Jason Furman, who served as chief economist to former President Barack Obama, stated that he doesn't believe labor gains for low-income employees with higher income are particularly inflationary because they don't earn enough to impact the economy as a whole. Instead, those employees have benefited from an economy with far too many job openings and not enough workers, a warning sign of an overheated economy, according to Furman.
Jason Furman stated, "If the only means of achieving equitable income distribution is through high and increasing inflation, then that is not the approach we want to take." Instead, he believes it's best for the economy to follow the trajectory it was on just before the pandemic, where rising wages and low inflation were both present. Furman further explains, "The economy was heated with one log on the fire each year, without worrying about undergoing a recession to tackle the issue." In contrast, many logs were hastily thrown into the fire this time, unsettling the equilibrium. Rachel Greszler, a senior policy analyst at the conservative think tank Heritage Foundation, appreciates how low unemployment generates better employment conditions for laborers, but she advises accomplishing those results through a powerful economy. In contrast, government aid that artificially stimulates demand beyond the economy's capability or reduces incentives to obtain a job could cause complications. Although Greszler acknowledges the benefits of providing government aid during the pandemic, such as additional support for jobless individuals or small businesses, she opines that it went on for an excessively long time. Nonetheless, Greszler hopes that some of the wage gains currently being experienced are sustained, considering a more potent labor market gives a more substantial cushion when encountering a likely recession.
The Fed plays a crucial role in determining the path forward. Powell's commitment to workers during the past has garnered him widespread favor and played a critical role in his reappointment. In 2020, the Fed adopted a novel labor-focused framework, with Powell pledging to avoid raising interest rates for as long as feasible. This breaks with decades of central bank practice. years before the pandemic, under President Trump's guidance, the American economy saw its lengthiest period of growth, and unemployment dropped to a 50-year low of 3.5 percent. Despite this, inflation had remained below the Fed's 2 percent target, validating the consensus that the central bank frequently responded too soon to quell nonexistent inflation. With the understanding that unemployment rates could be even lower without causing any problems, the Fed refrained from increasing interest rates until roughly a year after inflation began to rise in the aftermath of COVID-19. The decision granted the labor industry extra time to recover while allowing inflation to escalate. If prices continue to level off without causing significant damage to the job market, individuals from all income brackets could experience once-in-a-generation wage growth. If wage growth does slow down, but price growth declines by more, people will have more money in their pockets. However, if inflation remains unmanageably high, the Fed will feel compelled to employ more severe measures on the labor market to reduce spending and investment, resulting in more protests on the left targeting Powell. Despite the recent downturns in the stock market and increased borrowing costs, the corporate sector remains profitable.
Former Federal Reserve Vice Chair Lael Brainard revealed earlier this year, before she switched roles to become Biden's top economic advisor, that the portion of national income allocated to compensate employees had declined in the preceding two years. She also pointed out that "corporate profits as a share of GDP remain near postwar highs." Kark, the director of workforce innovations at a Community Development Financial Institution, agrees that while an increase in wages is essential, it's critical for employers to invest in training their employees to provide opportunities for progression. She believes that "higher entry-level salaries alone aren't sufficient to bridge those opportunity gaps." The University of Massachusetts Amherst Economist Dube is hopeful that some of the benefits attained by low-wage earners and the accompanying increase in income inequality will persist. These victories will continue to benefit these individuals for years to come. He stated, "That’s a lot of change packed in just a few years. It’s very hard to imagine something that plays that in reverse in the next three years."