Ryan Bourne and Nathan Miller
On the broadest national measures, real wages have regained the ground lost to the post-pandemic price surge. Average weekly earnings have outgrown consumer prices since just before COVID-19, and median real weekly earnings now stand above their late-2019 level. To some observers—including people in the Biden administration and then pre-Iran war in the Trump administration—that makes the enduring public anger over the cost of living hard to explain. If real pay is up, what is everyone complaining about affordability for?
Inflation and the economy remain voters’ dominant concerns, and as we’ve written before, public disapproval of the current president’s handling of inflation has sunk below Joe Biden’s worst, despite inflation remaining far below its 2022 peak.
Some of that enduring discontent is easy to understand. Consumers have lingering “sticker shock,” higher interest rates have made borrowing more costly, and President Trump suggested he could bring prices down, yet they’ve continued rising at above-normal rates, as his tariffs, deportations, deficit spending, and demands for looser monetary policy threw fuel onto the inflationary fire. More recently, the Iran war sent gasoline prices soaring, interrupting the real-wage recovery.
Yet those explanations are only part of the story. A new NBER working paper by Erik Hurst, Christina Patterson, Nela Thomas Richardson, and Ye Liv Wang provides fresh evidence that much of the angst is a lasting scar from workers’ pay falling (and staying) behind price rises in those years after the pandemic.
They look beyond national average wage data. Drawing on monthly ADP payroll records for about 16 million workers, the authors quantify how many Americans saw their wages keep ahead of inflation from 2021 to 2024. More than a third ended 2024 with lower real wages than they had at the start of 2021, and many of the rest saw smaller real raises than they might expect in more benign periods.
Their explanation is sticky wage-raising norms. Most firms applied a single modal annual raise to the bulk of their workforce. That raise “norm” clusters around round numbers, with the median job-stayer’s raise being exactly 3 percent from 2016 through early 2020. About 14 percent of all workers got a raise of exactly 3 percent in a typical year.
Yet when headline inflation rose to nearly 9 percent in 2022, the raise norm barely moved. Given that workers weren’t expecting inflation to be far above target and policymakers put it down to temporary factors that would unwind, wage-setting was initially unchanged. The result was a significant hit to workers’ purchasing power that, for a large group of them, hadn’t fully closed even by the end of 2024.
Among workers who stayed at the same firm from late 2020 through late 2024, 43 percent ended the period with lower real wages than they started with, with the average loss among them being 9 percent of their purchasing power.
Switching jobs helped many workers to re-peg their earnings to the new, higher price level, but people switched jobs too rarely overall for it to save the average worker. Across the authors’ full sample, 37 percent saw real wages fall from 2020 to 2024, and 58 percent ended up below their pre-pandemic trajectory.
Two More Reasons Politicians Should Avoid Inflation
Economists have long explained that many people hate inflation even when their wage growth tracks prices because they attribute raises to their own merit and blame price increases on macroeconomic forces, bad policy, or malevolent actors. The result is that workers perceive, if only psychologically, that they are working harder for the same purchasing power.
This paper confirms that there are firmer grounds for the recent discontent. First, for some groups, especially those who have stayed in the same job for long stretches, wages really did fail to keep up with prices over a longer period. And even where wages eventually caught up, the foregone purchasing power during the intervening months was never retroactively restored, meaning the arbitrary redistribution from wage-earners to firms remained.
Second, many job-switchers or employees who managed to keep pace with inflation did so only by incurring the transaction costs of job searches, retraining, and difficult wage renegotiations, which can be a deadweight loss. This is another cost of unexpected inflation: the effort expended to make sure you’re not made worse off by it.
None of this means that firms that saw rising profits as retail prices adjusted faster than their pay costs caused the inflation, as the greedflationists, or “profit-led” inflation theorists, say. Rather, once excessive nominal spending drove prices upward, the reality of relatively flexible product prices and stickier wages can temporarily shift real income from workers toward certain firms.
Blaming firms, rather than the bad underlying macroeconomic policy, can lead to destructive policy proposals, including price controls or excess-profits taxes.
But these draw the wrong lesson from the research. Wage norms were sticky, the authors explain, precisely because the high inflation was unexpected, and then policymakers told everyone it was transitory and might reverse. Had anything like 9 percent annual inflation persisted, firms would have re-indexed, and workers would have switched jobs more aggressively to keep up with the new price level. The norm of sticky wages is built for periods of low, stable inflation.
The real takeaway, therefore, is how costly truly unexpected inflation fueled by excessive monetary stimulus is. It not only tends to reduce real pay immediately, but can lead to several years of workers feeling behind as sticky wage norms adapt, with workers having to shift jobs when they wouldn’t otherwise to protect their wages.
