Wage growth may be slowing, but consumers still have the power to spend

Justin Ho Jul 28, 2023
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Purchasing power has increased because prices have been rising more slowly, said economist Preston Mui. Scott Olson/Getty Images

Wage growth may be slowing, but consumers still have the power to spend

Justin Ho Jul 28, 2023
Heard on:
Purchasing power has increased because prices have been rising more slowly, said economist Preston Mui. Scott Olson/Getty Images
HTML EMBED:
COPY

One big piece of macroeconomic data we got Friday was the employment cost index from the Labor Department. That’s a quarterly report about the wages and benefits employers are paying.

Overall, compensation rose 1% between the first and second quarter of this year — the slowest pace since mid-2021. But it’s welcome news for the Federal Reserve, which has been trying to tackle inflation, in large part, by slowing down the labor market.

But even if wage growth is easing, growth is growth. And right now, Americans still have a lot of purchasing power.

A year ago, inflation was eating away at wage gains. But around the end of 2022, that started to change, said Preston Mui, senior economist with Employ America.

“Right now, wages are growing faster than prices. So in real terms, on average, people’s purchasing power is increasing,” Mui said.

That’s because prices have been rising more slowly, he said, but a lot of employers are still struggling to hire. “That’s a good environment for workers. It gives them more bargaining power, it gives them opportunities for finding better jobs.”

If wage growth continues to slow down, disadvantaged groups could have the hardest time keeping up with rising prices, said Yana Rodgers, who directs the Center for Women and Work at Rutgers University.

“And on average, women and household heads of color are less able to absorb price increases because of average lower incomes,” Rodgers said.

Thing is, people on the lower end of the pay scale have seen some of the biggest wage gains over the last couple of years, said Betsey Stevenson, an economics professor at the University of Michigan.

“While that’s starting to slow down, we don’t see signs so far that the gains made are being undone,” Stevenson said.

She said that’s because during the pandemic, many employers invested in better technology that helped their existing workers do more. Like self-checkout stations that let workers help more customers at once.

“That makes people more productive, it makes it easier to pay them more because their value-added is higher,” Stevenson said.

And those kinds of improvements, she said, are never going away.

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