Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Raise Vanishes Before You Feel It
Transcript
- Lucas: So the government data says wages are up. Average hourly earnings for private workers hit $37.40 in April. That's a steady climb. But if you ask most people how their paycheck feels, you get a very different answer. Luna: Yeah, consumer sentiment just hit a record low last week. That's the lowest reading ever, and it's happening while the labor market looks strong on paper. Something's off. Lucas: What's off is the gap between the wage number you see in the headline and the wage number you actually have to spend. The employment cost index for wages sat at 177.5 in the first quarter of this year — up from 176.23 in the fourth quarter. So wages are rising, but slowly. Luna: But the CPI is rising too. April CPI was 332.4, up from 330.29 in March. That's still a positive inflation rate, even if it's moderated. Lucas: Right. The nominal wage increase gets eaten by inflation. But there's another layer — and this is the part that doesn't show up in the average hourly earnings figure. The mix of jobs is changing. When the economy added a lot of low-wage hospitality jobs during the recovery, that dragged the average down. Now, that mix effect is reversing. Luna: So the average is going up partly because fewer people are working low-wage jobs, not because everyone got a raise? Lucas: Exactly. Economists call it composition bias. If you strip out the mix effect, wage growth for individual workers is actually slower than the headline number suggests. The Federal Reserve Bank of Atlanta runs a wage tracker that adjusts for this — and it shows wage growth closer to 4.5 percent year-over-year, not the 5-plus you might infer from the average. Luna: And 4.5 percent nominal against 3-ish percent CPI inflation gives you maybe 1.5 percent real wage growth. That's positive, but it's barely keeping pace with rising costs in categories that hit hardest — like rent and insurance. Lucas: And that 1.5 percent is before you account for benefits. The employment cost index includes benefits, and that rose to 177.5 for wages but the total compensation index — wages plus benefits — went up faster. Because health insurance premiums and employer-side payroll taxes are climbing. Luna: So your employer is spending more on you, but you're not seeing it in your take-home pay. That's the classic benefits eating the raise story. Lucas: We actually did a whole episode on that — Episode 9, 'How Health Insurance Is Eating Your Raise.' But today I want to zoom in on something different. The slowdown in job switching. Luna: Because switching jobs is where the biggest wage gains have been happening. Lucas: Right. During the Great Reshuffle, people who quit and took a new job got raises of 8 to 10 percent on average. Stayers got maybe 4 to 5. That gap was the main driver of wage growth. But now, quit rates are down. Job openings are down from the peak. Fewer people are switching. Luna: So the high-wage-growth channel is narrowing. And the people who do switch are seeing smaller bumps because employers aren't bidding as aggressively for talent. Lucas: Exactly. Signing bonuses are way down from 2022 levels. The share of job postings offering a signing bonus peaked around 12 percent in mid-2022; now it's back to about 6 percent. That's a concrete number that affects real people. Luna: So the worker who stayed got a 4 percent raise, inflation ate 3 percent, benefits ate another chunk, and they're left with maybe 0.5 percent real purchasing power growth. That's not nothing, but it's not the boom the top-line numbers suggest. Lucas: And that's why sentiment is so low. People don't live in averages. They live in the specific cost of their rent, their car insurance, their grocery bill. And in the last year, car insurance alone is up over 20 percent. Rent is still rising, though slower. Grocery prices are flat to slightly down in some categories, but they never went back down from the 2022 spike. Luna: There's also a psychological dynamic. Once prices go up, they don't come down. Even if wages catch up, people feel like they lost ground permanently because the price level is higher. Lucas: That's the ratchet effect. And it's especially acute for things you buy frequently — gasoline, eggs, milk. You notice those price tags every week. Your annual raise hits your bank account once a year, and it's already spoken for. Luna: So the story of this moment is: nominal wage growth is okay, real wage growth is modest, and the gains are concentrated among job switchers, who are becoming rarer. Most workers are treading water. Lucas: And the policy implications are interesting. The Fed watches the employment cost index closely because it measures labor costs, which feed into services inflation. If wage growth slows, that's actually good for their inflation fight — but bad for workers. There's a tension there. Luna: One thing that struck me in the data: the 10-year breakeven inflation rate is 2.40 percent. That's the market's expectation for average inflation over the next decade. It's basically anchored. So the market doesn't think we're entering a new inflation regime. But the path to 2 percent is taking longer than anyone hoped. Lucas: And that extended period of elevated prices is what grinds down consumer sentiment. It's not the rate of change anymore — it's the level. People are comparing prices today to prices three years ago, and the cumulative increase is about 18 to 20 percent. Even if wages have gone up 15 to 17 percent in that time, you're still slightly behind. And psychologically, you remember the old prices. Luna: Especially for things like rent. If your rent went from $1,200 to $1,500 over three years, that's a $300 hit every month. Your raise might have been $200 a month after taxes. You're still down $100. Lucas: That's the micro-story behind the macro data. And it's why the disconnect between 'the economy is strong' and 'I feel poor' persists. The strong economy is visible in GDP, in the stock market — the S&P 500 at 7,473, the Dow at 50,580. But that doesn't flow down evenly. Luna: And the Russell 2000, the small-cap index, is up 3.4 percent in the last five days. That's actually a sign of broadening confidence. But again, that's investors, not wage earners. Lucas: Right. The stock market and the labor market are connected but not identical. And for most people, their primary economic experience is their paycheck and their bills, not their portfolio. Luna: You know, talking about this — it strikes me that a lot of the economic commentary we consume is built on averages and aggregates. And this show tries to go deeper. We deliberately keep it ad-free so we can follow the data where it leads without worrying about sponsors. Lucas: That's intentional. If walking through the economy with us has made something click — or if you just appreciate that there's no commercial break — you can support that choice. It's buy me a coffee dot com slash fexingo. No pressure, just an option. Luna: Yeah. And it helps us keep doing deep dives like this one. Now back to the data — because I want to ask you about one more number. Lucas: Sure, what is it? Luna: Median usual weekly earnings. For the fourth quarter of 2024 — the latest we have — it was $1,204. That's up from $1,159 a year earlier. That's about 3.9 percent growth. Which is actually a bit below the average hourly earnings growth. Lucas: Good catch. Median weekly earnings are less affected by composition bias because they capture the middle of the distribution. And 3.9 percent is lower than the 4.5 percent average hourly earnings growth. That tells you the typical worker is seeing slower growth than the average, which is pulled up by higher earners. Luna: So the average is misleading in two directions: it's inflated by composition effects and by high earners. The median is more realistic, and it shows a tighter squeeze. Lucas: Exactly. And if you adjust that 3.9 percent for CPI inflation of around 3.3 percent, you get about 0.6 percent real growth. That's almost nothing. It's positive, but it's not transformative. Luna: And the core PCE price index — the Fed's preferred measure — is at 129.3 as of March. That's up 0.3 percent from February. So inflation is still running above the Fed's target, but it's not accelerating. It's just stubborn. Lucas: Stubborn is the right word. And that means the Fed stays on hold for longer. No rate cuts soon. That keeps borrowing costs high for car loans and mortgages, which further squeezes household budgets. Luna: So the worker is getting squeezed from multiple sides: modest wage growth, high price levels, high interest rates, and benefits costs eating into compensation. No wonder sentiment is in the gutter. Lucas: But here's the thing — sentiment being terrible doesn't mean the economy is terrible. It means the recovery has been uneven and the price level shock is still being processed. Eventually, as wages continue to rise and inflation stabilizes, real purchasing power will improve. But it takes time. Luna: How much time? Are we talking years? Lucas: If you look at the breakeven inflation rate, the market expects about 2.4 percent inflation over the next decade. If wage growth holds at 4 percent or so, that gives you 1.6 percent real growth per year. In five years, that's about 8 percent cumulative real gain. But prices are still 18 percent higher than pre-pandemic. So it would take about a decade to fully catch up, assuming no new shocks. Luna: That's a sobering timeline. And it explains why the disconnect between data and sentiment isn't going away soon. Lucas: It also explains why the political conversation around inflation and wages is so heated. People are living through a multi-year adjustment, and they're tired of it. Luna: I guess the takeaway is: look beyond the headline wage number. Look at the median, look at the composition, and look at benefits. That's where the real story is. Lucas: And the real story right now is that most workers are just barely keeping up. But they are keeping up. That's the glass half full version. The glass half empty is that it doesn't feel like progress.