Wage growth is unrelated to inflation

Amid past periods of high inflation, economists have worried about a wage-price spiral: the idea that as workers seek higher wages to deal with inflation, employers pass these higher wages on to consumers in the form of higher prices, forcing workers to demand further higher wages, which creates a vicious cycle. However, there remains little to no evidence that workers’ wages are causing today’s high inflation. Looking at recent price and wage increases by industry makes it clear that there is no correlation between the acceleration in price inflation in any particular industry and the acceleration of wage growth in that industry. (see Figure 1)

Figure 1

At the same time, wage growth for many workers has been trailing behind inflation in 2022—although some of the lowest-wage workers have seen real wage growth. But this comes as real wages have been stagnant for decades for all but the highest-earning households. From 1979 to 2019, inflation-adjusted wages for the bottom 10 percent of households rose by just 6.5 percent; the median household saw growth of just 8.8 percent over those 40 years, while the 90th percentile of earners saw a whopping 41.3 percent growth.

Meanwhile, data from the AFL-CIO show that profits of S&P 500 companies rose by 17.6 percent in 2021—and the earnings of their CEOs grew by 18.2 percent. That’s more than twice as fast as inflation that year and almost four times as fast as nominal wage growth for regular workers. There is no evidence that typical worker wages are eating into profits either, as profit margins reached 15.5 percent in the second quarter of 2022 for nonfinancial companies, the highest they have been since 1950. (see Figure 2)