Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Where Your Raise Goes Before You Feel It
Transcript
- Lucas: Luna, we keep hearing that wages are up. Average hourly earnings hit $37.40 in April. That's a solid 3.2 percent annualized gain. But when I talk to people, they say their paycheck doesn't feel bigger. And they're right — in a way that's pretty mechanical. Luna: Mechanical how? Are we talking inflation eating the raise, or something else? Lucas: Inflation is part of it — CPI is up 3.1 percent year over year as of April. So that $37.40 has maybe 0.1 percent real gain. But the bigger story is what happens before the money even reaches your bank account. Payroll taxes, health insurance premiums, student loan payments — they've all grown faster than wages. Luna: So the raise gets intercepted by deductions before you can spend it. What's the biggest culprit? Lucas: Health insurance premiums. According to the latest employer survey, the average annual premium for single coverage is now over $8,600 — up about 7 percent year over year. That's more than double the rate of wage growth. And employees are shouldering about 30 percent of that. Luna: So a worker getting a 3 percent raise might see half of it eaten by higher premiums alone. And then there's the payroll tax side — Social Security and Medicare taxes are flat percentages, so they just rise with wages, but the Social Security wage cap is indexed to national average wages, which went up this year. Lucas: Exactly. The cap for Social Security payroll tax jumped to $176,100 in 2026, up from $168,600 last year. So if you earn above that cap, your raise pushes more income into the taxable bracket. The tax itself is 6.2 percent for employees, so that's an extra bite. Luna: And for the roughly 40 million Americans with federal student loans, payments resumed in 2023 and have been adjusting since. The average payment is around $400 a month. That's coming straight out of a raise. Lucas: Right. So we have this paradox: the labor market is historically strong — unemployment at 3.7 percent, job openings still above 8 million. Wages are rising. But the 'wage to pocket' pipeline has leaks. The Bureau of Labor Statistics tracks something called 'real average hourly earnings adjusted for taxes and benefits,' and it's barely budged. Luna: That's the series that subtracts not just CPI but also the employer cost for benefits? Or is it different? Lucas: Close — it's a broader measure that accounts for both inflation and taxes. It's not widely cited, but it tells a truer story. Since 2020, nominal wages are up about 22 percent. But this adjusted measure is up only about 8 percent. So the typical worker's purchasing power has grown by maybe 2 to 3 percent annually in real terms — but that's an average. For someone with high health costs or student loans, it could be zero or negative. Luna: And this is on top of the consumer sentiment data we've been seeing. The University of Michigan survey hit a record low in May — partly because of the Iran war and inflation fears. But I wonder, if people felt their raises were actually landing in their pockets, would sentiment be that bad? Lucas: I think that's exactly the disconnect. The macro data says the economy is fine. GDP grew 2.4 percent in Q1. The stock market is at all-time highs — the S&P closed at 7,527 today, up 1.3 percent this week. But households are stressed because their individual consumption bundles — rent, insurance, debt service — are rising faster than headline CPI. Luna: So the official inflation number doesn't capture their personal experience. And the wage number doesn't capture their take-home experience. That's a double mismatch. Lucas: Precisely. And I think the policy response has been slow because policymakers look at the top-line wage and price data and say, 'We're fine.' But the Federal Reserve's own Beige Book, released a few weeks ago, noted that 'many contacts reported that wage growth was being offset by higher benefit costs for workers.' Luna: I remember that. It also said some small businesses were shifting to higher-deductible health plans to keep premiums from rising even more. That means workers have higher out-of-pocket costs if they actually use care. Lucas: Yeah, the 'affordability gap' is widening. And here's the thing — we could fix part of this with policy. Expand the Earned Income Tax Credit, for instance. Cap health insurance premium growth relative to wages. Or index the student loan income-driven repayment to actual wage growth, not arbitrary thresholds. Luna: We've talked about the EITC before. It's one of the most effective anti-poverty tools, but it only helps low-income workers. What about the middle class? Lucas: Middle-class workers are getting squeezed from both sides — they earn too much for the EITC, but they're also the ones with employer-sponsored health plans and student loans. So maybe the answer is to make health insurance premiums tax-deductible for everyone, not just the self-employed. Or to expand the child tax credit again, which was shown to cut child poverty nearly in half during 2021. Luna: That expired, though. And politically, it's been stalled. But I want to bring it back to the individual worker. If someone listening feels like their raise is disappearing, what should they look at? Lucas: First, look at your pay stub. Check your gross pay versus net pay. Then look at the year-over-year change in each deduction. If your health insurance premium rose by more than your pay, that's the culprit. Second, check your W-4 withholding — if you got a tax refund last year, you might be overwithholding. Adjusting that can put money back in your pocket each month. Luna: And for student loans, if you're on an income-driven plan, recertify your income annually. If your payment hasn't changed but your income has, you might be overpaying. Lucas: Exactly. And on the employer side, some companies are starting to offer 'total compensation statements' that show what the employer pays for benefits. That can be eye-opening. But ultimately, the systemic issue is that benefits and taxes are growing faster than wages, and until that changes, the raise will keep leaking. Luna: It's one of those quiet structural problems that doesn't make big headlines but affects tens of millions of people every payday. Lucas: Yeah, and I think it's worth stepping back and saying — if walking through the economy with us has made something click for you, and you've gotten value from these conversations, we'd love it if you'd consider supporting the show. It's a simple thing: buy me a coffee dot com slash fexingo. No pressure, just a way for listeners who find this useful to help us keep it ad-free. Luna: Totally. It honestly makes a difference — that kind of listener support is what lets us dig into these angles that might not get covered on bigger networks. Lucas: So back to the mechanics. I think the other big factor that's often overlooked is the rise in state and local taxes. Since 2021, many states have increased gas taxes, sales taxes, or income tax rates to fund infrastructure or education. That doesn't show up in federal payroll data, but it hits household budgets. Luna: Some states have also added new paid family leave programs with employee payroll contributions. That's a good thing, but it's another deduction that reduces take-home pay. Lucas: Right. So a worker in, say, Washington state — which has a new long-term care payroll tax of 0.58 percent — is seeing that on every paycheck. It's small, but when you stack it with everything else, it adds up. Luna: What about the gig economy or side hustles? Do those help fill the gap? Lucas: They can, but gig workers pay self-employment tax — 15.3 percent — which is double the employee rate. So the tax bite is even larger. And they don't get employer-sponsored health insurance. So the 'leaks' are actually bigger per dollar earned. Luna: So the advice to 'just get a side hustle' isn't that simple. The structural headwinds are real. Lucas: Exactly. And I think that's the conclusion here: the data on hourly wages is real — they are rising. But the data on take-home pay is more ambiguous. Until we measure what workers actually deposit, we're telling an incomplete story. Luna: And that incomplete story drives policy that misses the mark. So maybe the first step is better measurement. Lucas: Yeah. The BLS actually started a pilot program last year to track 'real disposable income per capita' monthly. But it's not widely used yet. If that becomes a standard metric, we might see a different conversation. Luna: Alright, so next time someone tells you wages are up, ask them: after taxes, after premiums, after loan payments — how much is left? Lucas: Exactly. That's the number that matters.