Regardless of larger wages, inflation gave common employee a 2.4% pay reduce final 12 months

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A grocery store in San Francisco.

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Inflation is taking a large chunk of workers’ paychecks, wiping out many of the raises companies have offered to attract and retain employees in a hot job market.

But strong wage growth in certain sectors like hotels and restaurants has eclipsed these consumer price jumps — at least for now.

The biggest pay rises have come in some of the country’s lowest-paying jobs, helping to protect cash-strapped households from rising prices on staples like groceries.

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The consumer price index, a key measure of inflation, rose 7% year on year in December, the fastest rate since June 1982, the US Labor Department said on Wednesday.

The index takes into account the cost of many goods and services, from alcohol to fruit, airline tickets, firewood, hospital services and musical instruments. On average, a consumer who paid $100 a year ago is paying $107 today.

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

Despite this wage increase, higher consumer prices weighed on household budgets. In fact, the average worker took a 2.4% pay cut last year, according to seasonally adjusted data released by the Labor Department.

“The best year of wage growth in many, many years is still a loss for many households,” said Greg McBride, Bankrate’s chief financial analyst. “Their expenses increased even faster, negating any pay rise benefits they had seen.”

Who Beats Inflation?

The so-called real wages (wages minus inflation) vary greatly from household to household. The experience will vary based on the profession and consumer purchasing behavior.

For example, low-level workers in the leisure and hospitality industry — the lowest-paid sector of the US economy — received a nearly 16% pay increase to $16.97 an hour in 2021. This means that the average worker in a bar, restaurant or hotel saw wages increase more than twice faster than inflation, which equates to a net 9% increase in annual wages.

Similarly, annual wages for hourly workers in transportation and warehousing rose 8.4% to $25.04 an hour in December. Retail associates received a 7% increase to $19.20. These exceeded or equaled inflation.

The typical experience is [that] Inflation is likely to have significantly drained workers’ paychecks.

Daniel Zhao

Senior Economist at Glassdoor

According to Daniel Zhao, senior economist at Glassdoor, a careers site, employers have struggled to find workers to fill positions in these sectors.

High demand for labor (amid a near-record number of job vacancies) has prompted companies to raise wages. Wages also reflect the realities of the pandemic — workers may want a bigger paycheck to offset the higher risk that comes with these frontline roles, Zhao said.

While wage increases have outpaced inflation for some low-income earners, it appears that most households have not, Zhao added.

“The typical experience is [that] Inflation has likely had a significant impact on workers’ paychecks,” he said.

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

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

“Headlines about rising wages for frontline workers – even rising real wages – often mask the reality that wage levels are still low,” the analysis reads. “In today’s inflationary environment, even with rising wages, the minimum threshold for an acceptable wage level is rising.”

consumer purchase

d3sign | moment | Getty Images

Price increases are seen across a wide range of goods, but the increases are not evenly distributed.

Americans who use public transportation may have escaped some of the year’s biggest jumps in costs — for example, on gas and used cars and trucks. (They increased by 50% and 37%, respectively.)

Staples like rent and groceries are harder to avoid. (Their costs increased by 3.3% and 6.5% year over year, respectively.) Consumers could change their purchasing behavior to cut budgets, for example by replacing beef (which rose 19%) with chicken or fish.

An increase in annual rent could prove to be more lasting than in other areas, according to economists. Even a small percentage increase can quickly wipe out salary gains for lower-income renters, McBride said.

It is unclear how long inflation or wage increases will last. Many economists believe both will begin to taper off in 2022 as supply shortages ease (helping lower prices) and virus cases ease (increasing labor supply).

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