Recent Wage Gains Short-Lived as Inflation Reaches 40-Year HighMarch 7, 2022
When is a wage increase real? With inflation reaching a 40-year high, that’s a question every wage earner may be pondering. A wage increase is real in the sense that it keeps pace with or rises faster than the rate of inflation over a given period of time. Oregon and Federal minimum wage rates are useful targets for measuring growth in real wages over time. Measuring real wage growth during a pandemic and over a relatively short-term, however, has a number of drawbacks.
The Minimum Wage
Beginning in 2004, annual adjustments to Oregon’s minimum were tied to inflation, a system that remained in place through June 30th 2016. As a result, Oregon’s minimum wage generally maintained its purchasing power over the 2004-2016 period, rising from $7.05 to $9.25. Oregon’s inflation-based wage adjustments were lifted in subsequent years (2017-2023) and replaced by a schedule of annual increases based on an employer’s location. Oregon’s standard minimum wage will increase from $12.75 to $13.50 on July 1st 2022, its Portland Metro wage will increase to $14.75 and the rate for nonurban counties will rise to $12.50. (https://www.oregon.gov/boli/workers/Pages/minimum-wage-schedule.aspx) After June 30th, 2023, future increases in the minimum wage will be tied to inflation as measured by the U.S. City Average Consumer Price Index for All Urban Consumers.
Oregon’s inflation-adjusted minimum wage held its own, with its larger scheduled wage adjustments over 2017-2021 lifting real earnings for minimum wage workers. The Federal minimum wage, however, remains at $7.25, unchanged since 2010. In 2010 dollars the Federal minimum wage was worth about $5.83 in 2021, a loss of $1.42 per hour or about 20%. To maintain its purchasing power, the Federal minimum wage needed to reach about $9.00 in 2021.
Average Hourly Earnings
Real average hourly earnings failed to keep pace with the recent spike in consumer prices, turning negative in April 2021, a trend that continued through the most recent estimate for January 2022 (10 months). Consumer prices rose 7.5% in January (from one year ago), driven by food, electricity, and housing costs.
Leading up to the pandemic, U.S. average hourly earnings rose faster than inflation, as measured by the CPI-U U.S. City Average. Average hourly earnings experienced over-the-year growth ranging from 2.6% to 3.6% (on a monthly basis), while inflation rose 0.8% to 2.9%. Real average hourly earnings (inflation adjusted) rose by about 3.3% from January 2016 through February 2020; less than 1% annually.
Average hourly earnings rose sharply in April 2020 as the pandemic took hold, climbing 8.0% above its April 2019, year-ago level. Looking at 2020 as a whole, average hourly earnings rose by 4.9%, while inflation trailed significantly, at 1.2%. Over-the-year growth in average hourly earnings remained well above pre-pandemic rates in 2021, rising by 4.2% for the year despite a two-month pause in April (0.6% OTY) and May (2.2% OTY). But inflation rose by 4.7% in 2021, climbing from 1.4% (OTY) in January to peak at 7.1% in December. The January 2022 CPI-U U.S. City Average rose by 7.5% from its year-ago level, well above the 5.7% increase in average hourly earnings.
Average Hourly Earnings by Industry
Average hourly earnings entered a period of high growth at the onset of the pandemic but at the same time private industry in the U.S. cut about 19.6 million jobs (April 2020), a drop of 15.3%. Leisure and hospitality alone cut 7.5 million jobs and retail trade idled nearly 2.2 million. Industries with below average hourly pay accounted for about 78% of private industry’s job losses. The change in industry mix is a big reason why average hourly pay spiked. And although there was a massive loss of jobs, average hourly earnings at the industry level actually rose across the board. Private industry’s average hourly earnings rose by 4.2% over the year in April 2020, as it also cut 19.6 million jobs.
Average hourly earnings produced a 5.7% change from year ago in January – but with inflation reaching 7.5%, average hourly earnings fell 1.7% in real terms. Earnings growth above private industry’s 5.7% hit sectors with the most serious labor shortages and those faced with greater demand resulting from changes in consumer spending patterns as the economy rebounded.
Average hourly earnings in leisure and hospitality rose by 13% over the year ending in January, translating to a real average hourly earnings increase of 5.1%. Leisure and hospitality was the only private industry to produce real earnings growth. On the employment side, leisure and hospitality gained 2.4 million jobs over the year (seasonally adjusted), an 18.3% increase. Despite the employment gain, leisure and hospitality remained about 1.8 million jobs or 10% below its pre-pandemic level (February 2020).
Professional and business services actually gained 0.5 million jobs over its per-pandemic total, rising by 2.4% despite on-going labor shortages. Average hourly earnings in professional and business services rose by 6.9% while its real earnings fell 0.6%. Other industries with earning growth above the private industry average included these: education and health services (6.8%); transportation and warehousing (6.8%); and other services (6.0%). For industries with earnings growth below the private industry average, recall that growth in pre-pandemic earnings topped out at 3.6% and inflation reached no higher than 2.9%.
Real hourly earnings lost purchasing power over the past year – with inflation at a 40-year high, the pandemic nearing a hopeful end, and the labor market in flux; now that’s a volatile mix! Hourly earnings growth has slowed in recent months for leisure and hospitality, giving some hope that the wage growth in private industry will soon moderate and relieve inflationary pressure.