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Workers still struggling as inflation negates wage gains

by ABHA BHATTARAI THE WASHINGTON POST | January 23, 2022 at 4:11 a.m.
Deena Jalal, owner of plant-based ice cream chain FoMu, works behind the counter in her shop on Tremont Street in Boston on Friday, Jan. 14, 2022. Jalal says the cost of business overall rose 15% in 2021 compared to 2020. She has responded by raising prices about 10% and cutting back on some offerings. (AP/Michael Dwyer)

Raises negotiated as workers stay on the job amid pandemic staffing shortages are being eaten by the same economy that is making their services more valuable, say U.S. data and those very employees.

"That raise meant nothing," said Ty Stehlik, 23, who asked for and received a $15 hourly wage at the Milwaukee hotel where he works. "I've got student loans. My roommate [who also works at the hotel] has got medical debt. Most of my co-workers work two or three jobs, and they're still having difficulty making ends meet."

Stehlik is still relying on family members for help covering increased rent and grocery prices.

After years of barely budging, wage growth is now at its highest level in decades. The pandemic, combined with swift government stimulus and unexpected labor shortages, put workers in the driver's seat, giving them the kind of negotiating power they'd never imagined.

But in a twist, the same strong economic recovery that is emboldening workers is also driving up inflation, leaving most Americans with less spending power than they had a year ago.

Although average hourly wages rose 4.7% last year, overall wages fell 2.4% on average for all workers when adjusted for inflation, according to the Labor Department.

The only area in which pay increases outpaced inflation last year was in the leisure and hospitality industry, where workers generally make the lowest hourly wages of any sector. Workers there saw a 14% average raise, from about $17 an hour to more than $19.50, according to an analysis of Labor Department data.

In interviews with more than a dozen workers, many said that despite considerable pay raises -- as much as 33%, in some cases -- they were still struggling to cover basic expenses. Several workers said they had taken second jobs to keep up with rising costs for groceries, gas and rent. And many said their budgets will be even more strained once student loan payments resume in May.

Devon Norris works as a culinary arts high school teacher, and in the months since the pandemic began, his annual salary has increased by more than 20%, to $47,500.

Norris said it's still next to impossible to find an apartment in Jacksonville, Fla., that he can afford on his own. His basic expenses -- food, gas, utilities, car insurance -- have all ballooned in the past year. He pays $950 in monthly rent for a two-bedroom house, but he has been asked to move out so his landlord can sell the house. Comparable rentals in the area, he said, easily cost double what he was paying.

Norris, a former restaurant manager, has begun taking extra part-time jobs at restaurants to make ends meet.

"I make the most money I've ever made, but I'm still broke and struggling," he said. "I never saw myself being 37 and needing a roommate."

Inflation rose 7% last year, to its highest level in four decades, as supply chain disruptions and labor shortages collided with growing demand from U.S. consumers. Gas prices are up 50% from a year ago, while the price of meat, fish and eggs is up nearly 13%, according to the U.S. consumer price index.

But inflation and wage growth can become intertwined. Most economists consider this round of wage growth to be a natural result of the strong economic recovery, as well as competition for workers, but some worry that the cycle of high inflation and demand for higher wages can become self-reinforcing, as it was during the late 1970s and early 1980s.

If consumers and businesses start expecting inflation to continue for a long time, each side could keep trying to outbid the other -- businesses by charging higher prices and workers by asking for higher pay -- fueling yet more inflation.

Federal Reserve Chairman Jerome Powell said earlier this month that he is not yet seeing evidence of such a "wage-price spiral" but that the Fed is watching these trends closely as it prepares to combat inflation with interest rate rises this year.

And more critically, the big question is whether overall wage growth amounted to a one-time increase or the start of a period of more sustained gains, particularly for the economy's lowest-paid workers.

"The question is: How much of a deceleration will we see in wage growth this year?" said Nick Bunker, an economist at Indeed Hiring Lab. "A lot of those very strong gains were driven by the reopening, a surge of demand following the rollout of vaccines last spring, and households' strong balance sheets. But the outlook for 2022 is very unclear."

While the lowest-earning workers have seen the fastest wage growth in recent years -- partly the result of cities, states and major employers raising their minimum wages -- economists say that dynamic could change this year. Wages are beginning to tick up in white-collar industries that rely heavily on foreign workers and are struggling to recruit enough employees given the slowdown in immigration during the pandemic, according to Nela Richardson, chief economist for the payroll software provider ADP.

A recent report by the Conference Board found that U.S. businesses plan to raise wages by an average 3.9% this year, the fastest rate since 2008, with higher pay for new hires and inflation being cited as the main reasons behind those increases.

"Where we're starting to see wage pressures now is in professional business services, finance and information technology, where the talent war is strong and growing," she said, adding that wages are rising fastest in the Northeast and along the West Coast, where finance and tech workers tend to be concentrated.

Information for this article was contributed by Andrew Van Dam of The Washington Post.

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