Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Where Your Raise Goes Before You See It
Transcript
- Lucas: So we talk a lot on this show about whether your paycheck is keeping up with prices. But there is a layer to this that almost never gets discussed in the headlines. Luna: Which layer exactly? Lucas: The gap between what your employer pays you and what actually lands in your bank account. I am talking about all the deductions that happen before you even see the money — health insurance premiums, retirement contributions, payroll taxes, and the rest. Luna: Right — the stuff that comes out before you get your direct deposit. Lucas: Exactly. And the data shows that over the past few years, the cost of benefits has been rising faster than wages themselves. According to the Employment Cost Index, wages and salaries for private industry workers rose about 1.7 percent in the first quarter of 2026 compared to the previous quarter. But benefit costs rose over two percent. Luna: So even if your hourly wage goes up, a bigger slice is being taken off the top before you ever feel it. Lucas: That is the core problem. And it helps explain why consumer sentiment hit a record low this month — the Iran War headlines are one thing, but there is also this quiet erosion of purchasing power that people feel but can't quite point to. Luna: Give me a concrete example. Who gets hit hardest? Lucas: Take a mid-career tech worker earning say $120,000 a year in a city like Austin. Their employer might offer a 401 match — three to six percent — and a decent health plan. But over the last two years, the premium for that health plan has gone up by about 8 percent annually. Meanwhile, their base raise might be three or four percent. So even if their gross pay goes up, their net take-home after deductions can actually shrink. Luna: And that is before we even talk about inflation at the grocery store. Lucas: Right. The CPI is up about two point three percent year-over-year as of April. Core PCE is running around two point six. So you have this triple squeeze: prices are up, your nominal raise is modest, and the deductions are eating a bigger share. No wonder people feel like they are running in place. Luna: You know, I have a friend who works in HR for a mid-size manufacturing firm. She told me that when they do compensation reviews, they always highlight the total rewards package — salary plus bonus plus benefits value — to try to get employees to feel better. But she said most workers just look at their direct deposit and feel like it is not enough. Lucas: And that is a really important distinction. Economists talk about 'total compensation' including benefits, but households only care about what they can spend. If your health insurance premium goes up $50 a month, that is $50 less for groceries, gas, or savings — even if your employer technically paid more for your coverage. Luna: So what does the data say about how much of the raise is actually getting through? Lucas: The Bureau of Labor Statistics publishes data on average hourly earnings for private workers — that was $37.40 in April. That is up about four percent from a year ago. But if you look at the broader Employment Cost Index, which includes benefits, total compensation rose about four point two percent. So benefits are claiming a slightly larger share. It is not a huge gap, but it is persistent. Luna: And it compounds over time. Five years of that and you have a real difference. Lucas: Exactly. And there is another piece: the types of benefits that are growing fastest. Health insurance is the obvious one, but retirement plan costs — especially defined contribution plans like 401s — are also rising as more employers auto-enroll and increase match percentages. Luna: Which is good in theory — more savings — but it still takes money out of today's pocket. Lucas: Unless you are in a position to opt out, which most people are not because they need the match or the insurance. So the net effect is a structural drag on disposable income growth. Luna: This is actually one of those topics where I think listeners can do something useful — check their own pay stubs and see what percentage is going to benefits versus what it was a year ago. That is the kind of concrete thing you can bring to a conversation. Lucas: If today was actually useful to you, the way these stay ad-free is listener support. Head over to buy me a coffee dot com slash fexingo. Luna: Yeah, it is a small gesture that keeps us independent. We appreciate it. Lucas: Alright — back to the data. There is a forward-looking indicator that I think tells us something about where this is headed. The 10-year breakeven inflation rate is currently at two point four percent. That is the market's expectation for average inflation over the next decade. Luna: That is actually below the current headline CPI number, right? Lucas: Yes. CPI is running around two point three, but that is volatile. The breakeven suggests markets think inflation will settle around two point four, which is a bit above the Fed's two percent target. So the expectation is that the cost of living will keep rising at a moderate but persistent pace. Luna: And if benefit costs continue to rise faster than wages, that means even if inflation stabilizes, the squeeze from deductions continues. Lucas: Right. And we have to remember that benefit costs are not captured in the CPI at all. The CPI measures what consumers pay out of pocket for medical care, but the employer-paid portion is invisible. So the official inflation numbers understate the real pressure on household budgets. Luna: That is a big point. So the conversation about 'real wages growing' — which we have talked about on this show — might actually be overstating how much better off people are. Lucas: Exactly. Real wage growth, measured as hourly earnings adjusted by CPI, has been positive for about a year now. But if you adjust for the actual increase in what workers have to pay for health insurance and retirement — a kind of 'disposable wage' measure — the picture is much less rosy. Luna: I wonder if there is any policy response on the horizon. Some states have considered requiring employers to disclose the total value of benefits on pay stubs. Lucas: That would be a transparency move. But I think the bigger question is whether the trend is structural. If health care costs keep rising at 5-8 percent a year, and productivity growth stays around 1.5 percent, then benefits will keep eating into raises. The only way to break that is either to slow healthcare inflation — which has been stubborn — or to boost productivity enough that total compensation can rise faster. Luna: That is a long-run challenge. In the short run, people just have to budget around it. Lucas: And that is why we cover this. Because the headlines say 'wages are up' and 'inflation is cooling', but the lived experience for a lot of households is that their standard of living is still under pressure. This hidden deduction layer is a big part of that story. Luna: Alright, next episode we are going to look at something a bit more upbeat — we are going to talk about which cities have actually seen disposable income rise the most over the last year. Lucas: That sounds like a good one. Until then, watch your pay stub.