For the past year, American workers have experienced a boost in their purchasing power, thanks to a combination of falling inflation and a strong job market. This positive trend in real hourly earnings has provided a welcome relief for households facing challenges in affording everyday expenses. According to the U.S. Bureau of Labor Statistics, the average worker in the private sector saw their real hourly earnings increase by 0.8% from May 2023 to May 2024. This growth in “real” earnings reflects the net increase in workers’ wages after accounting for inflation, indicating that the average worker’s paycheck today can buy more than it could a year ago.
The recent upward trajectory in annual real earnings marks a significant shift from the previous trend, where inflation outpaced wage growth. This growth has been particularly strong for rank-and-file workers in non-managerial roles, signaling a positive development for working families. Chris Tilly, a labor economist at the University of California, Los Angeles, emphasized the significance of this increase in real wages, stating that it allows families to afford more while maintaining the same number of work hours. This boost in purchasing power may even enable households to reduce overall work hours, such as transitioning from two jobs to one or switching to part-time work in two-earner families, without compromising their standard of living.
Maximiliano Dvorkin, an economic policy advisor at the Federal Reserve Bank of St. Louis, highlighted the impact of pandemic-era dynamics on the equilibrium of real earnings growth. The surge in inflation, coupled with a robust labor market as the economy rebounded from the pandemic slump, created a unique environment that disrupted the usual patterns of wage growth. Job openings reached record highs, unemployment rates plummeted, and workers seized opportunities for higher-paying roles, leading to a spike in pay growth for the average worker.
Despite the challenges posed by inflation peaking at a four-decade high in mid-2022, the subsequent easing of inflationary pressures and the continued strength of the labor market suggest a return to more stable economic conditions. Consumers stand to benefit from this normalization, as it contributes to an overall improvement in their well-being over time. The significant growth in average nominal pay for all workers, along with the rise in pay for rank-and-file employees outpacing inflation, bodes well for the economic recovery and the financial security of American workers.
While the recent trends in rising wages and falling inflation present a positive outlook for American workers, there are lingering concerns about the overall sentiment towards the economy. Despite the progress made in increasing purchasing power and real earnings, workers remain cautious about the future trajectory of the U.S. economy. Addressing these concerns and sustaining the current momentum in wage growth will be crucial in ensuring long-term prosperity for American households.