Most American workers took an inflation-linked pay cut in 2021 | News
Most American workers have taken a pay cut in the past two years – even if they didn’t know it.
The cause was not general corporate tightening or restructuring. It was inflation that made everything more expensive by diluting the purchasing power of every dollar earned.
The pandemic has shaken up the global economy, piling up cargo ships outside ports and prompting millions of workers to jump ship for low-paying jobs. Both of these forces have impacted Americans’ wallets and career choices. Economists believe these cuts may actually get worse before they get better.
If a pandemic had not occurred, the average American worker was on track to earn 3% more north in 2022 than at the start of 2020, according to a study by the Peterson Institute for International Economics.
Wages have soared due to labor shortages. Businesses have suspended raises to keep storefronts, truck routes and restaurants open. In some cities, McDonalds offered salaries ranging from $21 to $8 more than the average salary for a McDonald’s employee nationwide.
Wages at Amazon jumped 17%. At Best Buy, the increase was about 4%.
But inflation deflated most of those gains. When Amazon employees go to pay their bills, they will notice that their actual increase was only worth about 10%, given the inflated prices they are currently paying.
And in the case of the Best Buy worker, they will notice that due to inflation they earn 2% less than in 2020, despite the increase.
In practice, the effect might look like this: a worker with a salary of $50,000 could have been propelled to $52,000. But in the queue at the local grocery store, that money is only worth $49,000.
“On average, the ability to consume goods and services declined,” said Wilson Powell III, a research associate at the Harvard Kennedy School of Business and one of the study’s authors. “They have higher salaries but their purchasing power is negative.”
Data from the Bureau of Labor Statistics indicates that inflation across the board has been 7.5% since January 2021. That number is more than three times higher than regulators’ 2% target for the inflation rate.
The only industry to be spared was leisure and hospitality, where an average wage increase of 8% outpaced inflation. Meanwhile, almost all other sectors – especially teachers and public sector employees – have been hit harder. Compensation for state and local government workers rose only 2.7%, meaning many of these workers took an inflationary pay cut of 4% or more.
Wages for public sector employees are generally determined by unions and collective agreements. In Michigan, most union employees received a 3.02% wage increase in 2022, said Kurt Weiss, public information officer for the Michigan Public Service Commission. A current budget proposal from Governor Gretchen Whitmer includes a 5% increase in base salary, but is subject to legislative approval and negotiation, Weiss said.
For now, economists think differences in wage gains are likely to drive more quits.
“It’s quite natural for the higher-paying industries to suck up the lower-paying industries,” said Daniil Manaenkev, an economic forecaster at the University of Michigan. “Anyone who can fill out a CV should be, because it’s the only way to protect themselves from inflation on an individual level.”
Manaenkev expects inflationary “wage cuts” to get worse before they get better, in part because of Russia’s invasion of Ukraine. Ukraine is a world mega-exporter of grain products, while Russia is the third largest oil producer and a major player in the natural gas industry. Disruptions to these supply chains will push prices up.
Economists like Manaenkev mainly attribute inflation to supply chains and strong consumer demand. But corporate price hikes are now increasingly identified by politicians and economists as another inflation accelerator. Many companies have raised prices – Tyson, Starbucks, Disney, Unilever – since the pandemic began. In public revenue calls, they justified their decision by saying that they pay more for raw materials and for employees.
Yet in some cases, corporate price increases have outstripped inflation. Tyson raised the price of the beef it sells by 31% in the last quarter of 2021. That’s nearly double the beef price inflation reported by the Bureau of Labor Statistics since January 2021.
Market-dominant companies with ‘pricing power’ have come under fire from President Joe Biden, who pledged to control inflation in his State of the Union address on Wednesday night .
“Too many families are struggling to pay their bills,” Biden said. “Inflation robs them of gains they otherwise thought they could experience. I understand. This is why my absolute priority is to control the prices.
In January, a Biden fact sheet described Tyson and other meat packers as middlemen capable of increasing their own profits at the expense of farmers and consumers. Sen. Elizabeth Warren, D-Massachusetts, went further. “Tyson is abusing its market power and making record profits by driving up meat prices,” she tweeted on Feb. 7.
Manaenkev said the link between corporate monopolies and inflation is less clear.
“It’s hard to attribute specific contributions, but it’s definitely part of the history of certain industries,” Manaenkev said. “The monopoly power that we have in this country is not immediately obvious to people.”
On Wednesday, Biden also touted subsidized child care and prescription drug price caps as other solutions to inflation. By negotiating drug prices through Medicare — he advocated capping the price of a month’s insulin at $35 a month — Americans will pay less and save more, Biden said.
Powell, the Harvard Kennedy School economist, said it was a solution that could help, but only in pieces. Biden’s focus on specific goods and services does not solve the overall inflation problem, Powell said.
The obvious mechanism for cooling inflation would be for the Federal Reserve (FED) to raise interest rates. But that move also has costs, Powell said.
“If they’re trying to slow inflation, that also means slowing the economy and slowing job growth,” Powell said.
Even so, the FED announced on Wednesday that it would begin raising interest rates this month and that watchdogs expect inflation to decline in 2022 alongside pandemic relief.
“It all comes down to trade-offs,” Powell said. “And those trade-offs aren’t necessarily very clear cut.”