The repeat situation may feel even more acute given that many workers are still catching up from the 2021-2022 inflationary bout, when companies gave workers only moderate pay raises that fell short of four-decade high price increases, according to new economic research.
From February 2021 to June 2022, real wages — or the purchasing power of the average American’s paycheck — fell by more than 4%, according to the paper from the University of Chicago and ADP researchers.
That hit proved lasting for many, with the analysis finding that 37% of workers whose payroll records researchers examined earned less in inflation-adjusted terms in December 2024 than they had four years earlier. Those losses were never made up, and now many Americans are re-experiencing a similar trend.
The Iran war has reignited inflation by raising oil and gasoline prices, which pushed the Consumer Price Index to an annual pace of 3.4% in July. That outpaced the 3.2% increase in workers’ hourly wages over the same period, leading to a decline in workers’ real wages.
The “long shadow” of the pandemic’s high inflation is still hanging over workers, University of Chicago Booth School of Business professor Erik Hurst, a labor economist and co-author of the paper, told CBS News.
“Workers were already behind the eight ball in terms of affordability, even going into inflationary pressures that started earlier this year from the war in Iran,” University of Chicago Booth School of Business professor Erik Hurst, a labor economist and co-author of the paper, told CBS News.
Gloomy consumer sentiment
Researchers used monthly payroll data from ADP covering 16 million workers to analyze firms’ practices in setting wages and raises. They found that most firms peg annual raises to a common norm, making only modest adjustments during periods of high inflation.
That failure to peg pay raises to inflation caused real wage losses, the research found. Before the pandemic, workers were typically given pay increases of about 2% to 4%, but when inflation hit a 40-year high of 9.1% in June 2021, companies stuck with their regular pay hikes. Many workers lost financial ground as a result, according to the analysis.
Hurst said most companies have wage growth “norms” whereby workers, including himself, receive a relatively standard 3% wage increase each year.
“That’s what I got at [University of] Chicago, which works well when inflation is at 2%, because it gives us 1% real wage growth,” he said. “But when inflation exceeds 3%, then real wages start to erode.”
The latest bout of inflation, driven directly by oil price increases, is contributing to diminished consumer sentiment because workers can see they are losing ground financially, according to Hurst. In August, consumer sentiment dipped about 8%, reversing two months of improvement, according to the University of Michigan.
“When real wages are low, well-being is low because purchasing power has gone down,” Hurst said. “Consumer sentiment is low, despite unemployment being low and employment being relatively high.”
Inflation transfer
If a company gives a worker a 3% pay adjustment when inflation is at 4%, that effectively amounts to a 1% pay cut.
This dynamic creates an “inflation transfer,” effectively shifting the burden of higher prices from corporations to workers.
For example, assuming a worker’s productivity does not drop by 1% over one year, but their real wages fall by the same amount, a company benefits from that same productivity but is paying wages that are 1% lower.
“Real wages are low and firm profits are high, and they are not unrelated to each other,” Hurst said.
Job hopping and wages
One way to avoid real wage erosion is to switch jobs, according to the report, which found that job changers’ wages rose nearly in line with inflation. But that comes with its own costs, according to Hurst.
“People who switch jobs tend to keep up with inflation, which is great, but switching jobs is not free,” Hurst said. “You have to expend effort to look for a job, move your family and change your workflow. Some actions workers take to keep up with inflation are themselves inherently costly.”
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