Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Raise Is Bigger Than Your Neighbor's Depends on the Industry
Transcript
- Lucas: So the May jobs report comes out Friday, and everyone's going to be watching the headline payroll number — analysts expect something around 180,000. But there's a quieter story in the wage data that I think matters more for workers right now, and it's about which industry you happen to work in. Luna: Because a raise in hospitality doesn't buy the same as a raise in tech, right? Lucas: Exactly. And the gap is actually widening. Let me give you the numbers. Average hourly earnings for all private workers hit $37.50 in May, up 4.1 percent from a year ago. That's fine. But when you break it down by sector, you see leisure and hospitality workers got a 5.2 percent raise over the same period, while workers in financial activities got just 3.8 percent. Luna: So the folks serving food and cleaning hotel rooms are seeing bigger percentage raises than people in banking. That feels counterintuitive. Lucas: It does, but it makes sense when you think about the mechanics. Leisure and hospitality was hammered during the pandemic, and those wages had further to catch up. Plus, a bunch of states and cities have raised minimum wages — California went to $16 an hour last year, New York City is at $16.50. That pulls up the whole bottom of the wage distribution. Luna: And that's also why we see this disconnect between the average raise and what people actually feel. If you're a software engineer in San Francisco getting 3.5 percent, you might be angry because inflation is still running around 4 percent on core CPI. Lucas: Right. So your real wage — your raise minus inflation — is negative. You lost purchasing power. Meanwhile, a hotel front desk clerk in Phoenix might have gotten a 6 percent raise and is actually gaining ground. The experience of the economy depends on what job you do. Luna: And this is a great example of why we keep this podcast ad-free. We want to have these specific, honest conversations without anyone telling us to frame it a certain way. If you find value in that, you can support us at buy me a coffee dot com slash fexingo. It's a small thing that keeps us independent. Lucas: Absolutely. Thanks for that. So back to the data — the Bureau of Labor Statistics also tracks wage growth by industry in their Employment Cost Index, which came out in January. That showed wages in leisure and hospitality rising 5.5 percent year-over-year, versus 3.4 percent in professional and business services. That's a two percentage point gap. Luna: And that gap is actually bigger than it was two years ago. In early 2024, the spread was closer to one point. Lucas: Right. So the question is: is this narrowing inequality? Or is it just a temporary catch-up that will reverse? Luna: I think it's partly catch-up, but there's also a structural argument. The pandemic permanently shifted some labor demand toward services — people still want to travel, eat out, go to concerts. That's not going away. Lucas: True. But the flip side is that white-collar industries like tech and finance are going through their own adjustments. We've seen layoffs in big tech, more cautious hiring, and that puts downward pressure on wage bargaining. Meanwhile, the leisure and hospitality sector has been chronically understaffed since 2021, so employers have to pay up. Luna: There's also the composition effect. A lot of the job growth we've seen recently has been in lower-wage industries. The ADP data from Wednesday showed private payrolls grew by 122,000 in May, and a big chunk was in leisure and hospitality and education and health services. Lucas: That's exactly it. If you're adding more jobs in lower-wage sectors, that can pull down the average wage even if individual workers in those sectors are getting raises. So the headline number of 4.1 percent might actually understate how much individual workers are seeing. Luna: Which is a great reminder that averages can be misleading. Let's talk about what this means for someone who's thinking about switching jobs. If you're in a low-wage industry, your bargaining power is pretty strong right now. Lucas: Extremely strong. We saw data from the Atlanta Fed's Wage Growth Tracker that job switchers are getting raises of around 6.5 percent, compared to about 5 percent for job stayers. That gap is wider than it's been in years, and it's especially pronounced in lower-wage sectors. Luna: So the advice would be: if you're in retail or hospitality and you're not getting at least 5 percent, you should probably look around. Lucas: Yeah. But there's a caveat. The New York Fed's survey on household finances just came out yesterday, and it showed that worries about finances hit the highest level since July 2022. People are anxious about debt, about rent, about the cost of living. Even with a 5 percent raise, if your rent went up 8 percent, you're still behind. Luna: And that's the real wage story. Let's stick with the numbers. Core CPI, which excludes food and energy, was at 4.2 percent annualized in April. So a 5.2 percent raise in leisure and hospitality gives you a real gain of about one percentage point. But if you're in financial services with a 3.8 percent raise, you're losing ground. Lucas: And if you're in a sector like construction, where wage growth has been around 4.0 percent, you're basically treading water. The only reason construction wages aren't higher is that housing demand has softened with higher mortgage rates. Luna: So the winners right now are service workers, especially in leisure and hospitality. The losers are white-collar professionals in finance, tech, and some professional services. Lucas: But let's be careful with the word 'losers.' A banker making $200,000 with a 3.5 percent raise is still in a much better absolute position than a hotel worker making $35,000 with a 6 percent raise. The percentage gain doesn't change the fact that the dollar gap is enormous. Luna: That's a crucial point. This is about the purchasing power of the raise, not the level of pay. And it also matters what you spend your money on. Lower-income workers spend a larger share of their income on rent, food, and gas — categories that have seen higher inflation recently. Lucas: Right. The PCE price index, which is the Fed's preferred measure, was up 4.1 percent in April. And core PCE was up 4.0 percent. So even for those service workers with a 5.2 percent raise, the real gain is maybe one point. That's better than nothing, but it's not a windfall. Luna: And the 10-year breakeven inflation rate is at 2.36 percent, which suggests the market expects inflation to cool. But that doesn't help you today. Lucas: No. And the longer-term trend is what we'll be watching. If wage growth in lower-paying sectors continues to outpace inflation, that could gradually compress the income distribution. But it would take years, maybe decades, to make a meaningful dent in inequality. Luna: And there's also the risk that these wage gains in service sectors lead to higher prices, as businesses pass on labor costs. That could eat up the real gains. Lucas: That's the classic wage-price spiral concern. But so far, we haven't seen strong evidence of that. Productivity has been improving, and businesses have been absorbing some of the cost increases. The bigger risk is that the Fed keeps rates high to fight inflation, which could slow the economy and hurt the very workers who are finally seeing gains. Luna: So what's your takeaway for our listeners? If you're a worker, what should you do with this information? Lucas: I'd say, know your industry's wage trend. If you're in a sector where wage growth is below 4 percent, you have less bargaining power, but also less risk of being replaced. If you're in a sector where wages are growing fast, you have leverage — use it. And don't just look at your raise; look at what your rent, your grocery bill, and your health insurance are doing. The real wage is what matters. Luna: And if you're an employer, the message is clear: if you're not keeping up with your industry's wage growth, you're going to lose workers. Lucas: Absolutely. The labor market is still tight enough that workers have options. The quits rate may have come down from its peaks, but it's still above pre-pandemic levels. People are still willing to move for a better offer. Luna: So we'll be watching Friday's jobs report closely. The wage number will be important, but we'll also look at which industries added jobs and where the wage growth is concentrated. Lucas: Exactly. And we'll break it down for you here. That's our show for today. Thanks for listening.