The last few years have brought a dry topic, mostly reserved for economic and financial wonks, to the forefront of peoples' minds: inflation. The gradual increase in the prices of goods and services over time, inflation results in money buying less than it used to.
While the national median salary rose 33% from 2012 to 2022, the median real salary rose only 4%. Roughly half of all occupations are keeping pace with or beating inflation. However, some high-demand roles, such as those in the skilled trades, saw real wage declines.
Surprisingly, even with persistently high inflation, wages are often reported on using nominal terms (except by our economists). Paychecks may be higher, but for many, spending power is down—even for those in high-demand jobs. We can't talk about "good jobs" unless we take inflation into account. So we thought we'd take a look at what’s gone on with salaries over the last 10 years, in real terms.
The Importance of Real Wages
Looking at wages in real terms helps communities understand more accurately the situation of workers. Purely using nominal wages as an economic development metric can give the impression that wages are on the rise when in fact they aren’t.
This can have a community operating from uneven footing on talent retention work (perhaps real wages are better in other markets, driving workers away). Or it could throw off sector strategies, most of which are built around not just growing sectors, but growing sectors with good jobs. Looking at wages and occupations in real terms will more clearly demonstrate whether a job is good, at least when it comes to wages. Thus, real wages better inform career pathways, job counseling, and industry development.
Inflation, Real, and Nominal Wages
Due to inflation, when it comes to wages, there are two types: nominal and real. Nominal wages are the wages or salary earned in current, unadjusted dollars. They represent the actual amount of money received from an employer. Real wages (also referred to as wages in constant dollars), on the other hand, take into account the impact of inflation on nominal wages. Real wages are adjusted for changes in the price level over time, revealing how purchasing power, or the real value of an income, has changed. If real wages increase, it means an individual can buy more with their income even after accounting for inflation. If they decrease or remain stagnant, their purchasing power is eroding due to inflation.
Data scientists, medical providers, and personal care workers are some of the roles that saw the most real wage gains. An aging population will likely continue to put upward pressure on medical providers while roles such as data scientist and database architect reflect shifting skill demand.
Just Holding On
Many salaries beat inflation over the last decade. Of the 796 occupations examined, about half had positive real salary gains, albeit some very minimal. Additionally, 33 roles stayed flat. In one sense this is a positive, as the role hasn’t lost value. But in another, it’s a negative. If you’re a worker in one of these roles, it’s hard to stomach that you haven’t had a raise in 10 years.
How have some notable and much talked about roles performed when it comes to wage gains? Skilled trades are often said to be hard to find and frontline workers are needed to keep daily life running. Is this demand amidst a tight labor market reflected in wages?
The Good News
It’s good news that half of all occupations are keeping pace with or beating inflation. Additionally, certain sectors have seen solid gains. Food Preparation and Serving Related occupations saw an average real wage increase of 20% and only one of its 17 roles had a wage decrease (first-line supervisors, -1%). Personal care and service has seen a 16% bump. This includes roles such as childcare workers (+13%), baggage porters and bellhops (+23%), and all other personal and care and service workers (+32%).
Perhaps due to the explosion of digital media, streaming channels, and demand for content, Arts, Design, Entertainment, Sports, and Media Occupations accrued an average of 5% real wage gains. This includes roles such as special effects artists and animators (+27%), media and communications workers (+23%), news analysts, reporters, and journalists (+14%).
The Bad News
While good news that half of all occupations have kept pace with inflation, it’s bad news that half haven’t. And that bad news is even more stark when compared to nominal wages. Nominally, only 18 occupations saw wages decline. That means there are alot of positions that seemingly have experienced wage growth, but when it comes to purchasing power, the value of the salary has fallen.
For example, 11 occupations saw 13% nominal wage gains from 2012 to 2022, what most would consider robust wage growth. But in real terms, those 11 occupations actually fell -11% or -12%. Nominal wages are misleading, giving the impression that nearly all occupations have been moving up and to the right. But in reality only half are gaining purchasing power.
In the Long Run...
Some more good news, bad news. The inflation rate has been falling, which is good. But the Federal Reserve doesn’t expect inflation to return to 2% (the target rate) until 2026. Persistent inflation, not 9.1% peak of 2022, but 3-4%, stands to erode nominal wage gains in many occupations. Over the long term wages tend to grow slightly faster than inflation. As we’ve seen, over the last 10 years they’ve grown 4%.
But as we’ve also seen, this varies greatly by occupations, with some performing well against inflation and others not. And while in the long run real wages outperform inflation, people and communities operate in the present. Meaning the year-over-year real wage drops of -1.3% in 2021 and -3.3% in 2022 are felt and top of mind. Thus, taking a long-term view and waiting for the market to correct in many cases may be untenable. Or, as economist John Maynard Keynes put it, “In the long run, we are all dead.”
Communities are already struggling to engage local workers. A sense among many that they aren’t getting ahead won’t help. As the most direct lever for increasing the labor supply, economic development organizations, chambers, and workforce agencies need to be willing to discuss with employers the often sensitive topic of wages and demonstrate inflation’s eroding effect on them.
A next step for communities would be to determine staffing patterns of their industries. For example, if local industries have heavy concentration of Management, Architecture and Engineering, and Legal occupations, with -10%, -11%, and -13% drops in real wages respectively, these industries could struggle to retain employees and grow.
Lastly, what constitutes a good job is a question which should be continually asked. Prior to 2022, the highest annual inflation rate going back 20 years was 3.9% in 2008. Employers and workers have become accustomed to low inflation. But if we are moving, or have already entered, a time of persistent inflation, real terms may need to become the terms in which the wage component of a good job is assessed. Perhaps a good job isn’t one which offers competitive wages, a statement seemingly based on nominal wages, but one that guarantees annual cost of living adjustments.
Salary data was adjusted for inflation using CPI market basket numbers. For example, 2022 had a market basket value of 292.6125 while 2019's value was 255.65. Salaries for 2019 were then multiplied by 292.6125/255.65 to adjust for inflation. Occupations were taken using SOC detailed occupation groups. Only occupations with data for the past 10 years are shown.
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