Most U.S. Workers Took an Inflation Pay Cut in 2021

Mar. 6—TRAVERSE CITY — Most American workers have taken a pay cut in the past two years — even if they didn't know it.

The cause wasn't widespread corporate belt-tightening or restructuring. It's inflation, which has made everything more expensive by diluting buying power of each dollar earned.

The pandemic jostled the global economy, piling up freight ships outside ports and spurring millions of workers to jump ship on low-paying jobs. Both of those forces have impacted Americans' wallets and career choices. Economists think those cuts may actually get worse before they get better.

If a pandemic hadn't occurred, the average American worker was on track to make north of 3% more in 2022 than they were at the beginning of 2020, according to a study by the Peterson Institute for International Economics.

Wages zoomed on the back of labor shortages. Companies dangled raises to keep storefronts, truck routes, and restaurants open. In some cities, McDonalds offered wages as high as $21 — $8 more than the average pay of a McDonald's employee nationwide.

Wages at Amazon jumped by 17 percent. At Best Buy, the raise was about 4 percent.

But inflation has deflated most of those gains. When Amazon workers go to pay their bills, they'll notice that their real raise was only worth about 10 percent, when accounting for inflated prices they now pay.

And in the case of the Best Buy worker, they'll notice that, because of inflation, they make 2 percent less than they did in 2020, despite the raise.

In practice, the effect might look like this: A worker with a $50,000 salary might have been bumped up to $52,000. But in the checkout line at the local grocery store, that money is only worth $49,000.

"On average, the ability to consume goods and services has fallen," said Wilson Powell III, a research associate at the Harvard Kennedy School of business and one of the study's authors. "They've gotten higher wages but their purchasing power is negative."

Data from the Bureau of Labor Statistics says inflation across the board tracks at 7.5 percent since January of 2021. That number is more than three times regulators' 2 percent target for the inflation rate.

The only industry to be spared was leisure and hospitality, where an 8 percent average rise in wages outpaced inflation. Meanwhile, nearly every other sector — particularly teachers and public sector employees — have been hit harder. State and local government workers compensation only increased by 2.7 percent, which means many of those workers took an inflationary pay cut of 4 percent or higher.

Public sector employee wages are usually determined by unions and bargaining agreements. In Michigan, most unionized employees received a 3.02 percent pay hike in 2022, said Kurt Weiss, a public information officer for the Michigan Civil Service Commission. A current budget proposal by Gov. Gretchen Whitmer includes a 5 percent base-pay increase, but is subject to legislative approval and negotiation, Weiss said.

For the time being, economists think the differences in wage gains likely will lead to more resignations.

"It's pretty natural that the higher paying industries will suck the lower paying industries dry," said Daniil Manaenkev, an economic forecaster at the University of Michigan. "Everyone who can fill out a resume should be, because that's the only way that at an individual level you can protect yourself from inflation."

Manaenkev expects inflationary "pay cuts" will become worse before they get better, in part because of Russia's invasion of Ukraine. Ukraine is a global mega-exporter of grain products, while Russia is the third-largest oil producer and a significant player in the natural gas industry. Disruptions in those supply chains will drive up prices.

Economists like Manaenkev primarily pin inflation to supply chains and high consumer demand. But price hikes by corporations are now increasingly being identified by politicians and economists as another inflation accelerant. Numerous companies have cranked up prices — Tyson, Starbucks, Disney, Unilever — since the pandemic began. In public earnings calls, they've justified the decision by saying they pay more for raw goods and to staff employees.

Yet in some cases, corporate price hikes have outstripped inflation. Tyson raised the price of beef it sells by 31% in the last quarter of 2021. That's nearly twice the price inflation for beef that the Bureau of Labor Statistics reported since January 2021.

Market-dominant companies with "pricing power" have been criticized by President Joe Biden, who vowed to tame inflation in his State of the Union address Wednesday night.

"Too many families are struggling to keep up with their bills," Biden said. "Inflation is robbing them of gains they thought otherwise they'd be able to feel. I get it. That's why my top priority is getting prices under control."

In January, a Biden fact sheet described Tyson and other meatpackers 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 their corporate market power and raking in record profits by jacking up meat prices," she tweeted on Feb. 7.

Manaenkev said the connection between corporate monopolies and inflation is less clear.

"It's hard to assign specific contributions but it's definitely part of the story in some industries," Manaenkev said. "The monopoly power we have in this country is not immediately obvious to people."

On Wednesday, Biden also cast subsidized childcare and price-caps for prescription medicines as other solutions to inflation. By negotiating drug prices via Medicare — he argued for capping the price of a month's worth of insulin at $35 per month — Americans will pay less and save more, Biden said.

Powell, the Harvard Kennedy School economist, said it's a solution that might help, but only in bits and pieces. Biden's focus on specific goods and services doesn't address the overall inflation issue, Powell said.

The obvious mechanism for cooling inflation would be for the Federal Reserve System (FED) to raise interest rates. But that decision comes with costs, too, said Powell.

"If they try to slow down inflation that also means slowing down the economy and slowing down job growth," said Powell.

Despite that, the FED announced Wednesday it will begin to raise interest rates this month, and that the overseers expect inflation to trend down in 2022 in tandem with pandemic relief.

"All this comes down to trade-offs," said Powell. "And these trade-offs aren't necessarily very clear."