US wages are rising rapidly, but not enough to keep up with inflation

Jason Furman (PIIE) and Wilson Powell III (Harvard Kennedy School)

US  wages are rising rapidly, but not enough to keep up with inflation


Between December 2020 and 2021, wages and salaries for civilian workers rose by 4.5 percent, the fastest annual increase since 1983. This fast growth has driven salaries 1.2 percent above their pre-pandemic trend. But prices have also risen rapidly. Once adjusted for inflation, workers are worse off than before the pandemic.

Real wages, wages adjusted for inflation, increased in the first six months of 2020 as prices fell and wages continued to grow. Since then, however, price growth has outpaced wage growth. Real wages fell by 2.4 percent over the last year and are now 1.2 percent lower than they were in December 2019. If real pay had kept pace with its pre-pandemic trend, it should have risen by 2.1 percent over the period.

Faster real wage growth depends on how tight labor markets continue to be, whether employers adjust wages to account for higher inflation, and the extent to which inflation remains elevated. Nominal wage growth should remain strong in 2022 and inflation should ease at least somewhat, but it is unlikely that any increase in real wages will be large enough to return to their previous trend.

This PIIE Chart is based on Jason Furman and Wilson Powell III's blog post, US wages grew at fastest pace in decades in 2021, but prices grew even more.

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