Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / How Your Raises Are Finally Beating Your Boss's Raises
Transcript
- Lucas: So there's this narrative that wages are finally beating inflation, and we've talked about that a lot on this show. Luna: Right, and we've seen data showing real wage growth has turned positive. Lucas: But the new BLS data released last week adds a really important layer: it breaks down wage growth by percentile. And the story gets more interesting when you look at who is actually getting the biggest raises. Luna: I saw that. Workers at the 10th percentile — the lowest paid — saw their wages jump nearly 6 percent over the past year. Lucas: Yeah, 5.8 percent to be exact, through May. Compare that to workers at the 90th percentile — the highest earners — who got about 3.2 percent. That's a pretty big gap, and it's been widening over the last couple of years. Luna: So the people at the bottom are catching up, at least in percentage terms. Lucas: Exactly. And it's not just the BLS data. The Atlanta Fed's wage tracker shows similar trends — lower-income quartiles have been outpacing the top quartile for about 18 months now. This is a structural shift from the post-2008 era, where high-end wages grew much faster. Luna: What's driving it? Tight labor market, obviously, but anything else? Lucas: The labor market is the biggest factor. With unemployment at 3.8 percent and job openings still elevated, employers in retail, hospitality, and warehousing have had to raise wages to attract workers. Those sectors tend to employ more lower-wage workers. Meanwhile, white-collar and executive pay has been more restrained — partly because of slower corporate profit growth and partly because the tech sector, which was a big driver of high-end wages, has been in a hiring lull. Luna: And we've seen minimum wage increases in about 20 states this year, right? Lucas: Right. Twenty-two states raised their minimum wage as of January 2026. Some went up by a lot — California is at $17.50 an hour, Washington at $17.25. That mechanically lifts the bottom of the distribution, and it also pushes up wages just above the floor as employers adjust to keep their pay scales. Luna: So the gap is narrowing. But does that mean income inequality is actually improving? Lucas: It's complicated. In percentage terms, yes — the gap in growth rates is narrowing. But in dollar terms, the absolute gap is still widening. A 3 percent raise for someone earning $200,000 is $6,000. A 6 percent raise for someone earning $30,000 is $1,800. So the rich are still getting richer in absolute dollars, just not as fast relative to their starting point. Luna: That's a crucial distinction. And the data on wealth inequality shows the top 1 percent still holds a huge share. Lucas: Yeah, the Federal Reserve's Survey of Consumer Finances, which is a bit older but still instructive, shows the top 10 percent hold about 70 percent of total wealth. So wage growth at the bottom helps with income, but it doesn't erase decades of asset accumulation at the top. Luna: Let's talk about the inflation context. We just got the May CPI print — 4.2 percent annual headline inflation. That's high. Lucas: Right, and that's a problem for low-wage workers because their raises, even at 6 percent, only beat inflation by about 1.8 percentage points in real terms. And if you look at what they're actually spending on — rent, groceries, gas — those categories have been running hotter than the overall CPI. Luna: So a 6 percent raise might feel more like 3 or 4 percent in real purchasing power for a lot of families. Lucas: Exactly. And then you add the energy shock we've seen in the last month — wholesale prices surged 1.1 percent in May, driven by energy. That will eventually hit consumer prices at the pump and on utility bills. So the real wage gains for low-income workers could get squeezed further. Luna: And the ECB just hiked rates for the first time since 2023, partly because of Iran conflict energy costs. That suggests global inflation pressures are still building. Lucas: It's a reminder that wage gains don't happen in a vacuum. If you're a low-wage worker and your rent goes up 7 percent while your grocery bill goes up 5 percent, a 6 percent pay raise doesn't get you ahead — it just keeps you treading water. Luna: So the headline 'wages beating inflation' is true for the median, but it's fragile at the bottom. Lucas: Fragile is the right word. And it depends on the inflation measure you use. If you use core CPI, which excludes food and energy, the annual rate is 3.9 percent. So a 5.8 percent raise for the 10th percentile looks better against core — about 1.9 percentage points of real growth. But most low-wage households don't exclude food and energy from their budgets. Luna: Right, they spend a much higher share of income on those items. So core CPI understates their inflation experience. Lucas: Exactly. That's why the PCE price index, which the Fed prefers, has been running a bit lower — core PCE was at 2.8 percent in April. But again, that's a national average, not specific to low-income households. Luna: So what does this mean for the Fed? Does the wage compression at the bottom change their thinking? Lucas: I don't think it changes their near-term path. The Fed is focused on inflation, and with headline CPI at 4.2 percent, they're going to stay on hold or maybe even hike if they see inflation becoming entrenched. But longer term, if wage growth at the bottom continues to outpace the top, it could boost consumer spending, which is about 70 percent of GDP. That could keep the economy growing at a steady pace even if the Fed is tight. Luna: And that spending is especially important because lower-income households have a higher marginal propensity to consume — they spend almost everything they earn. Lucas: Right. So a 6 percent raise for a low-wage worker is more stimulative than a 3 percent raise for a high-wage worker, because the high-wage worker saves more of that raise. So this wage compression could actually be positive for aggregate demand, if it sustains. Luna: But it only sustains if the labor market stays tight. And we've seen some softening in job openings lately. Lucas: Yeah, the JOLTS data from April showed openings fell to 8.1 million, down from a peak of over 12 million in 2022. So the labor market is cooling, but it's still historically tight. The question is whether that cooling will accelerate and start to weaken wage growth at the bottom. Luna: If you have a listener who is in a lower-wage job and seeing these raises, what's your advice? Lucas: My advice would be to lock in those gains by building an emergency fund and paying down high-interest debt, because the labor market might not stay this tight forever. And if you can, try to negotiate for skills training or education benefits — things that can help you move up the wage ladder even if the economy slows. Luna: That's a good point. The biggest raises are happening at the bottom, but the best long-term path is still to move to higher-paying roles. Lucas: Exactly. And one more thing — if you're a manager or business owner, the data shows that investing in your low-wage workers is paying off in terms of retention and productivity. Companies that have raised wages are seeing lower turnover and better morale. So it's not just a cost — it's an investment. Luna: Alright, let's take a quick break here. If walking through the economy with us has made something click, and you want to help us keep doing this without ads, you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to chip in, and it really helps us stay independent. Lucas: Yeah, we don't run ads, so listener support is what keeps the lights on. If you find value in episodes like this, consider it. Now, back to the wage picture — one thing I want to add is that the compression we're seeing at the bottom isn't just about minimum wage laws. It's also about worker bargaining power. Luna: You mean unions? Lucas: Partly. Union membership ticked up to 11.2 percent in 2025, the first increase in years, and a lot of that is in hospitality and retail — sectors that have been historically non-union. That's giving workers more leverage. Also, the 'Great Resignation' style quit rates, while down from 2022, are still elevated compared to pre-pandemic. Workers who are willing to switch jobs are getting bigger raises than those who stay. Luna: So the bottom is rising not just because of policy, but because workers have options. Lucas: Exactly. And that's a healthy sign for a labor market. But we need to watch whether that holds if the economy slows. The ECB hike and the inflation data remind us that central banks are still leaning against inflation, and that could eventually cool the labor market. Luna: So the window of opportunity for low-wage workers might be open now, but it's not guaranteed to stay open. Lucas: Right. And that's why the policy conversation around things like the minimum wage and worker training matters so much. If we want to make these gains permanent, we need structural supports, not just a tight labor market. Luna: Good place to leave it. Thanks, Lucas. Lucas: Thanks, Luna. Until next time.