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Wages have become the big gotcha of 2022

After the pandemic brought wage gains, inflation not only wiped them out, it resulted in a loss of purchasing power.

Wages are the first big “gotcha” of the 21st century. Or, to enter the Land of Fancy Words, wages are the big pyrrhic victory of 2022.

What do I mean?

Just this. After years of tiny wage increases for most workers, it seemed that COVID-19 might bring one big-time dividend: major increases in wages. And, in fact, it actually happened. This year is on its way to showing one of the largest wage gains in this century.

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There’s only one problem.

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A clear trend shows wages have been increasing nicely — at a 5% to 6% rate. The trend was underlined last week with the announcement that we added over 528,000 new jobs in July and that average hourly earnings rose 5.2%.

But here’s the pyrrhic victory part.

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The gain has been dwarfed by an inflation rate of nearly 10%. The result is starting to look like the largest loss in purchasing power workers have experienced in this century.

This is not an abstraction. We’re talking about what workers can actually buy with their paychecks.

Between 2000 and 2019, workers lost purchasing power in six years. They had a purchasing power gain of 1% or less in an additional seven years. Workers did better than 2% in only three years in the entire period (2009, 2015 and 2020).

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The best year was the nominal wage gain of 5.9% in 2020. After modest inflation, that was a massive 4.7% real gain, the largest this century.

That year gave rise to the notion that workers were finally in position to see a long period of significant wage gains. Tables were turned. Shoes were on other feet. A fast-growing economy with an aging workforce was running out of workers.

It certainly looked that way to me. Last year, in August, I wrote a series of optimistic columns about the Great Reversal.

But it was not to be.

In 2021, nominal wage gains continued to be high at 5.8%. But after adjusting for inflation, the gain was next to nothing, only 0.5%.

Which brings us to 2022.

In July, nominal wage gains still looked attractive at 5.2%. But the gain turns into a loss after inflation, which has been running about 9%.

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That purchasing power loss, nearly 4%, is likely to be the worst of any year in this century.

You can see what’s happening, writ large, by looking at the position of federal government employees. According to FedSmith, a website that focuses on federal employee issues, government workers are heading for a 4.6% pay raise in 2023. If it materializes, it would be the largest since an increase of 4.8% in 2000.

But even if it materializes, it will represent a loss in purchasing power approaching 5%.

For additional confirmation, I went to the FRED statistical database at the St. Louis Federal Reserve Bank website. An article on the site explores real wages from 2009 to the present using four different wage measures. It shows real gains over that period ranging from 5.4% for all private sector employees to only 1.7% for all manufacturing wages.

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Wage gains were materially better over that period than in the first 10 years of this century. So it’s a pretty good bet that real income gains have netted out to near zero over the entire period.

When it comes to income for people who still work for a living, it looks like we’re in a Can’t Get There From Here situation. If employers raise wages more, inflation will rise more. If wages aren’t increased more, purchasing power will decline.

Is there a way out of this pickle? Yes, but it’s a long shot.

If the inflation rate declined very rapidly, dropping to the 2% rate the Federal Reserve wrings its hands for, we could slip through this year and next with a small increase in worker buying power. The rapid decline in gasoline prices gives some hope.

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But without that decline, our economy will be losing too much purchasing power to avoid the recession no one wants.

Stay tuned.