Is wage growth sustainable? Evidence from real wage growth across groups

Many American workers feel that the COVID-19 pandemic has left a dramatic imprint not only on their lives but also on their income security. Americans continue to report elevated concerns about economic security despite strength in many indicators.¹ One of these indicators, and a key component to household economic stability, is real wage growth. Growth in real wages determines whether a worker’s pay can buy a stable set of goods after inflation.

Like much else about the U.S. economy, real wage growth bounced back from the pandemic. Since mid-2023, American earners have been experiencing real gains as inflation receded and the labor market remained healthy. But this good news for households has come with a note of worry: Is this wage growth perpetuating inflation at a level above the Fed’s target of 2 percent?² How these gains are distributed also matters. Have wage gains been evenly distributed or helped to close existing gaps? Or have some groups yet to see the pace of their earnings growth recover?

Real wage growth is not exceptionally strong

Figure 1 shows that real wage growth—nominal wages deflated by the personal consumption expenditures (PCE) price index—averaged 1.8 percent between 1997 and 2019.³ After briefly increasing in the early phases of the pandemic, real wages fell sharply in 2021 and 2022 as inflation jumped and real wage growth turned negative. More recently, real wage growth has returned to its average level in the years leading into the pandemic, without exceeding it.

After some real losses during peak inflation of 2021 and 2022, real wage growth for the median worker has returned to its pre-pandemic level of around 2.1 percent. This matches the average for the data series over 2015–2019 (the horizontal bar on Figure 1) but falls far short of exceptional periods like the late 1990s or mid-2010s, where growth in wages was greater, more persistent, or both.

Although in line with its value prior to the pandemic, recent real wage growth could still be a concern if it outstrips productivity gains. When productivity is improving, real wages can rise with less concern about inflation, since the gains reflect shares of greater economic output, not just price increases. Productivity growth data can be quite noisy year to year, so it is still hard to know where the series will settle post-pandemic. But over the five quarters since January 2023, productivity growth has averaged 1.75 percent, slightly higher than the productivity numbers that accompanied similar levels of real wage growth in the years leading up to the pandemic (Figure 2). What’s more, real wage growth has lagged productivity growth in the most recent five quarters, a pattern in line with the history of the two series over the past 40 years.⁴ These observations suggest that productivity growth is sufficient to support current levels of real wage growth without stoking inflation.

Wage growth across groups also returning to pre-pandemic levels, but with exceptions

The aggregate evidence so far suggests a normal, rather than excessive, level of real wage growth. But what does wage growth look like for groups of workers rather than the labor force as a whole? Breaking down wage growth data by groups is important for two reasons. First, it sheds light on whether the pandemic changed the types of skills that are in demand or where work is done, which can lead to a recovery that is strong for some but incomplete for others. Second, understanding the distribution of real wage growth in the economy (across sectors, geographic areas, and jobs) provides perspective on spending and price pressures. For example, high real wage growth for lower earners helps those who struggle most with inflation but can also generate more spending in response.

Consider one group that experienced big changes during and after the pandemic: service-sector workers in leisure and hospitality. Patterns in this sector reflect widespread restaurant labor shortages experienced by so many American consumers. Starting in the late 1990s, leisure and hospitality jobs generally experienced much lower wage growth than other industries. The pandemic flipped this pattern (Figure 3).

Today wage growth for these workers closely matches other workers across the economy. But as with aggregate measures, real wage growth for this group is not running ahead of where it was over the 2015–2019 period.

Disaggregating American workers along other dimensions also shows wage growth settling into patterns similar to the late 2010s. Real wage growth for many groups in 2024 aligns closely with growth those groups experienced in 2019. Moreover, most cases where the pandemic disrupted earlier patterns of relative wage growth proved fleeting. For example, wage growth for workers outside of major metropolitan areas pulled even with metro workers as downtowns emptied out and shutdowns continued in the immediate aftermath of the pandemic, reversing the relationship that endured through most of the recent decades. However, so far in 2024 workers in cities are again seeing their wages grow faster than those elsewhere (Figure 4), although that growth is slightly slower than in 2019. (Wage growth outside cities is slightly faster than in 2019.)

Another fading pandemic trend: historic gains for job switchers. Raises for people who change jobs almost always run ahead of those who stay put. But after the pandemic, job quitters were especially rewarded. However, Figure 4 shows that wage gains for switchers are now about a half percentage point below even their 2019 level.

Although real wage growth has returned to pre-pandemic levels for most demographic groups, some exceptions deserve our attention. While men’s wage growth was slightly higher than that of women before the pandemic (and for most of the prior decade), women’s wages have been growing slightly faster than men’s since 2023 (Figure 5). Moreover, real wage growth for men has not returned to its 2019 level.

The same is true for wage growth among non-White earners. Figure 5 shows both male and non-White workers are seeing wage growth in 2024 of one-third to one-half percentage point below 2019 levels. As with other angles on relative wage growth, these trends are not indicative of inflationary wage pressures.

Real wage growth coming out of the pandemic was strongest for low-income workers, a phenomenon that was widely discussed.⁵ The bottom 50 percent of earners were, in fact, the only ones to experience real wage gains through the peak inflation period.

We can now see that—for the moment, at least—these relative gains have come to an end. Low earners are no longer logging greater wage gains than higher earners. At this writing, wage growth for the lower quartile of earners is almost a full percentage point below its 2019 level (Figure 6).

These patterns suggest that earnings growth in the economy going forward will look much like it did prior to 2020. If anything, relative earnings gains for some groups may lag gains from that earlier period. Returning to the longer time period that opened this research note, Figure 7 shows that real wage growth across the distribution is currently compressed, with earners at all levels seeing similar levels of growth. This is in contrast to periods like the late 1990s and late 2010s, where low earners saw relative gains—a pattern that many identify with a hot labor market.

By this measure, the distributional situation provides further evidence that the labor market is not overheating. However, it also means that real wage recovery for some workers remains incomplete.

Real wage growth in perspective

While policymakers must remain alert to new developments, the evidence presented here suggests that wage pressures remain contained. Real wage gains are at levels that accompanied low inflation heading into the pandemic. Although changes in productivity are difficult to measure and unfold over many years, we see signs that higher productivity might be supporting some of the wage growth of American workers.

On the question of who is seeing real wage growth, most of the notable changes in relative wage growth following the pandemic have faded. Gains that boosted relative wages for lower earners, job changers, and those outside metro areas have receded. Wage growth rates for men, non-White workers, and those with lower earnings now fall well short of their 2019 paces. The result is that today’s growth in real wages is no longer closing the gap between low and high earners. Many others may be feeling the effects of purchasing power that is growing more slowly.

Endnotes

1 Gallup polling found that consumer confidence shrank to its lowest levels since the Great Recession during the peak inflation period in 2021 and 2022. This polling also found that inflation concerns have persisted. In 2024, 40 percent of households consider the high cost of living/inflation as the top financial problem facing their family.

2 Our analysis complements other recent work on this question. Research from the Boston Fed published in January suggests wages were still catching up to the post-Covid inflation shocks. A recent blog post from the Atlanta Fed argued that work-from-home arrangements helped to curb wage growth during the pandemic period. Both notes suggest that there is still room for wages to grow without driving inflation.

On the other hand, there has been significant and often contradictory media attention directed toward answering this question. The Wall Street Journal reported on April 30, 2024 that continued growth in the employment-cost index could complicate the Fed’s efforts to tame inflation, while reporting from Reuters argues that wage growth could help facilitate a soft landing.

3 The average is based on the PCE-deflated series, as the PCE inflation measure is the one targeted by the Federal Open Market Committee. The comparable average when using the consumer price index (CPI) is 1.4 percent. As Figure 1 shows, the main patterns are apparent regardless of which inflation adjustment is used. The Atlanta Wage Growth Tracker data series we use to measure nominal year-over-year wage growth begins in 1997.

4 When the first quarter of 2024 is separated from the recent-period average to balance seasonality with the 2015–2019 period, real wage growth still trails productivity growth in both post-pandemic subperiods.

5 Recent research suggests that these gains were significant. Increases in labor market competition during the pandemic contributed to an unexpected compression of wages between earners at the 90th and 10th percentiles. Economists David Autor, Arindrajit Dube, and Annie McGrew find evidence that up to a third of the earnings gap created since the great divergence of wages began in 1979 was closed within the 3 1/2 years of the pandemic period. See: Autor, Dube, McGrew, “The Unexpected Compression: Competition at Work in the Low Wage Labor Market” (2023).