Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Real Wage Growth Still Feels Invisible to Workers
Transcript
- Lucas: So the headline this week from the Bureau of Labor Statistics: average hourly earnings for private workers hit $37.40 in April, up from $37.35 the month before. That's a 0.13 percent gain — about a nickel an hour. Luna: A nickel. And that's supposed to be good news, right? Wages are going up. Lucas: Right, but here's the thing — when you look at the CPI reading for April, also out this month, the index sits at 332.4, up from 330.29 in March. That's about a 0.64 percent increase in consumer prices in a single month. Luna: So prices are rising more than four times faster than that nickel raise. That's the whole wage-price squeeze in one number. Lucas: Exactly. And this is the disconnect I keep coming back to. The employment cost index — which is a broader measure of total compensation including benefits — rose to 177.5 in the first quarter of this year. So employers are spending more on labor. Lucas: But the average worker doesn't feel it. Partly because a lot of that cost increase is going into health insurance premiums and retirement contributions, not into take-home pay. Luna: And partly because the composition of who's getting raises matters. I saw a breakdown from an economist at Indeed — wages in leisure and hospitality have jumped something like 6 percent year-over-year. But professional services, finance, tech — those are basically flat. Lucas: That's the composition effect right there. If you're a bartender or a hotel housekeeper, your wage is going up because employers had to bid for scarce labor after the pandemic. If you're a software engineer or a marketing manager, your wage is stuck. Lucas: And since the average hourly earnings number is a simple average across all private workers, it gets dragged down by the huge share of white-collar jobs that aren't seeing raises. Luna: So the national average of $37.40 masks a really uneven picture. It's not that nobody's getting ahead — it's that the gains are concentrated in lower-wage sectors, which is good, but it doesn't help the median office worker. Lucas: Right. And speaking of the median — the most recent data for median usual weekly earnings is from January 2025. That was $1,204. That's for full-time wage and salary workers. Lucas: Now, if we adjust that for inflation using CPI, the real purchasing power of that $1,204 has actually declined since early 2025. So the typical worker — not the average, but the middle — has lost ground. Luna: Which is why you see all these polls saying most Americans think the economy is terrible even when GDP is growing. Their lived experience is that their paycheck doesn't stretch as far. Lucas: There's a lag issue too. Wages tend to adjust slowly. Companies set annual budgets, they don't raise pay every time the CPI ticks up. So there's a delay between inflation hitting and wages catching up. Lucas: The question is whether that catch-up is happening now. Core CPI — which excludes food and energy — was at 335.4 in April, up from 334.17. That's still running above 2 percent annualized. Luna: But the bond market seems to think inflation is cooling. The 10-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — fell to 2.44 percent as of yesterday. Down from 2.49 earlier this month. Lucas: That's a notable move. It suggests that investors expect the Fed's tightening — and the new chair Kevin Warsh, who's being sworn in this Friday — to eventually bring inflation down. But that's a forward-looking expectation. Lucas: For a worker today, the next three months matter more than the next three years. And the next three months of data will show whether wage growth can accelerate enough to catch up with the price level. Luna: So what would need to happen for the median worker to actually feel a real wage increase? Nominal wages would need to grow faster than CPI, obviously. But also, the sectors that have been stagnant — like professional services — would need to start raising pay. Lucas: Yeah, and that might require a tighter labor market in white-collar fields. Right now, tech layoffs and a slowdown in professional hiring have kept a lid on wages there. If hiring picks up, you could see those wages start to move. Lucas: But there's another factor: productivity. If workers are producing more per hour, companies can afford higher wages without raising prices. But productivity growth has been mediocre — around 1.5 to 2 percent annually. Luna: So we're stuck in this loop where wages go up a bit, but prices go up too, and the worker doesn't get ahead. And the Fed is caught between wanting to cool inflation and not wanting to choke off the labor market. Lucas: Right. And with Kevin Warsh taking over, there's speculation that the Fed might raise rates again in July — the 'bond vigilantes' are pushing for it. That could slow the economy and potentially weaken wage growth even further. Lucas: So the near-term outlook for real wage growth is pretty mixed. The April data shows nominal wages are rising slowly, but not fast enough to offset inflation for most workers. Luna: And that nickel an hour — it's not nothing. But when a gallon of milk costs 30 cents more than it did last year, it disappears pretty fast. Lucas: Exactly. So the key takeaway for today: don't look at the average hourly earnings number alone. Look at who's getting the raises and whether those raises are beating inflation in their local economy. The national picture is hiding a lot of variation. Luna: And keep an eye on the Fed. If Warsh raises rates in July, that could be a signal that they're willing to risk a softer labor market to get inflation down. That might break the wage-price spiral — but it might also break some workers' budgets. Lucas: Right. And I think that's the underlying tension in this whole conversation. Everyone wants lower inflation. But the path to lower inflation often involves slower wage growth. And for the worker who's already feeling squeezed, that's a tough trade-off. Luna: So the question is — can we get inflation down without wages falling? Or is some wage sacrifice inevitable? Lucas: That's the million-dollar question. And the data over the next few months will give us the first real clues under the new Fed chair. So stay tuned.