Are Wages Keeping Up with Inflation?
Inflation and wage growth are two measures economists watch closely and, in theory, are closely linked — as one rises, the other follows. For employers, labor costs are among the highest costs, which means rising wages often translate into rising prices for consumers (inflation) to adjust for those costs. In the last few years, pay has grown slowly for American workers. So, are wages keeping up with inflation in cities throughout the U.S.?
Before we answer that, it should be noted that what really matters for workers is what economists call real wage, or the pay workers take home after accounting for how inflation has carved away their purchasing power. If workers want to enjoy a rising standard of living, their wages need to grow at least as fast as inflation. For that reason, paychecks and inflation usually move in the same direction. But the two don’t always move together at the same rate.
To discover more about the current relationship between wages and inflation, we looked at the connection between real-time wage growth according to Glassdoor’s Local Pay Reports and the consumer price index, one metric for inflation from the Bureau of Labor Statistics, over the past few years in 10 of the nation’s largest metro areas. To help journalists and researchers explore this analysis on their own, we’ve included our Python code used to pull wage data from our Local Pay Reports and merge it with the Bureau of Labor Statistics CPI data here.
Here are some highlights:
- Wages and inflation have a strong correlation. Although wages have been growing slowly in recent years, our data confirmed there’s a strong correlation (that both measures move in the same direction) between metro inflation and wage growth, except in a few cities. This is an important distinction, to confirm the two influence each other.
- Where are wages real-ly growing? Real wage growth is the growth present after accounting for inflation. Chicago has seen the highest real wage growth in recent years, rising at an average of 1.4 percent per year over roughly the past three years since November 2014.
- Where are real wages not growing? Atlanta has the lowest real wage growth in recent years, falling by an average of -0.1 percent per year since November 2014. It’s followed by San Francisco, which is rising by an average of just 0.1 percent per year.
- Inflation has recently outpaced wage growth …but not why you think it has. Although the relationship between inflation and real-time wage growth is unique in each metro area in our analysis, inflation generally outpaced wage growth throughout most of the country in 2017. Why? Because wage growth has remained so slow, especially in the last year, despite steady job growth and a strong labor market. American workers have felt that with paychecks that have fallen in real terms over the past year.
What We Did
For this analysis, we combined two publicly available data sets. First, we pulled salary data from Glassdoor’s Local Pay Reports, which provide a real-time view of median base pay for full-time workers based on millions of salaries shared on Glassdoor. Next, we combined the data with inflation figures from the Bureau of Labor Statistics’ Consumer Price Index (CPI), a widely used measure of inflation that tracks average price changes urban consumers pay for a basket of goods and services.
We then looked at the correlation — do the two move in the same direction, and if so, how strongly — between median pay growth and inflation from November 2014 to November 2017 in 10 large U.S. metros.1 This allowed us to see 1) whether the two metrics are in fact correlated and if so, 2) are they moving at the same rate and which metros are falling behind. (Note: Python code to replicate our analysis is available here.)
Inflation and Wage Growth Are Linked
Overall, our analysis confirms there’s a clear link between inflation and wage growth across the 10 metros we studied, and for the U.S. as a whole. It’s an important piece of information to confirm, as it shows that one metric influences the other. The interactive graphic below shows a simple scatterplot of inflation versus year-over-year wage growth for average pay growth data. Each dot represents one metro area, in one month, between November 2014 and November 2017.
In the figure, it’s easy to see that inflation and wage growth are positively correlated. As one measure goes up, the other follows. However, try flipping through each metro market yourself in the graphic by changing the metro area. You’ll see that some markets have weaker correlations, while others are much stronger — reflecting the uniquely different labor market situations in each of these diverse metro areas.
Source: Glassdoor (Glassdoor.com/research).
Pay Growth Strongly Correlates with Inflation in Atlanta, Chicago, Los Angeles, and New York City
In the table below, we show the overall correlations between inflation and wage growth for each metro area and the U.S. overall. For the U.S. overall, there is a +0.32 correlation between BLS inflation and wage growth according to Glassdoor’s Local Pay Reports. Across metro areas, wages and inflation are positively linked in 9 of the 10 metros we examined.
|Inflation – Wage Growth Correlation Coefficient|
|New York City||0.33|
Source: Glassdoor (Glassdoor.com/research)
Wage growth and inflation in Atlanta tracked most closely among the metros we examined, with a correlation of +0.48. The gap between wage growth and inflation in Atlanta was less than half of a percentage point several times over the past three years. It’s followed by Chicago (+0.39 correlation), Washington, D.C. (+0.38 correlation), and Los Angeles (+0.35). In these metros, workers’ paychecks have moved closely with inflation over the past few years, as predicted by standard economic theory.
In some metros, wage growth has sharply outpaced inflation, delivering big economic gains to workers. Two examples are Chicago and New York City. On average, wage growth has been 1.4 percentage points above the rate of inflation in Chicago, and 1.1 percentage points above inflation in New York City in recent years. These two labor markets are enjoying a strong recovery, benefiting millions of workers who are employed there with higher real wages.
Pay Growth Correlates with Inflation Least Closely in Houston, San Francisco, and Seattle
The cities where wages and inflation have tracked each other least closely include Houston (-0.30 correlation), San Francisco (+0.08 correlation), and Seattle (+0.05 correlation). Since the two metrics typically move together, we have to look at external factors that are contributing to the weaker correlation. For example, Houston has been battered by major hurricanes and their labor market has experienced low oil prices, leading to weak wage gains that fell well behind inflation.
In tech-heavy San Francisco and Seattle, there is a different story for the weak connection between pay growth and inflation. Both cities have grown rapidly in recent years, thanks to booming tech jobs. This has caused growing pains in the form of rapidly rising living costs, which has broken down the usual link we see between pay and inflation in more stable times.
For example, San Francisco today has one of the highest living costs in the country. Home values have risen 12.8% over the past year, according to Zillow. But thanks to recent tech-fueled growth, it also has one of the fastest rising rates of inflation. Wages in San Francisco have grown sporadically over the past few years — mostly keeping pace with inflation. In 2017, inflation began to outpace wages in San Francisco. Throughout the past year, wage growth has continually lagged behind inflation in San Francisco, causing real median pay for full-time workers to fall by about 1 percent — despite a booming job market. Similarly, tech-heavy Seattle has experienced a similar pace of inflation during 2017, which has similarly dampened its strong wage gains. Real wages in Seattle fell by about 1.1 percent over the past year.
What’s Special About Tech Hubs?
What is it about metros with a strong tech presence that weakens the inflation-wage growth link? One cause is that tech companies draw talent outside their markets to feed their rapid growth. This influx of workers places additional stress on the local housing markets, already in short supply.
Why would workers be willing to put up with such high living costs if they’re not justified by much higher wages? One reason is company culture and good benefits. Many workers gravitate toward great companies and may be willing to sacrifice somewhat on pay in exchange for other types of benefits. For example, companies recognized in the Glassdoor Employees’ Choice Awards 2018 Best Places to Work list, half of the top 10 companies in the U.S. are tech employers. These top tech companies attract talent with benefits and unique perks, opportunities for meaningful work, and strong company culture. For many workers, these non-wage perks may contribute to the weak correlation between pay and inflation in tech-heavy metros.
Real Wages Dip Across Metros
On average, most metro areas experienced positive real wage growth over the three year period of our analysis. However, that trend took a significant downturn in 2017, with real wages — a worker’s remaining pay after subtracting the rate of inflation — falling in every metro we examined. That’s despite today’s 17-year-low unemployment rate and an economic expansion that’s the third longest on record since the 1850s.
In the interactive graphic below, we show the annual pace of real wage growth for the 10 metro areas we examined. The figure shows the pace of median base pay growth, minus the pace of inflation, for each metro area. Chicago saw the strongest real wage growth, rising at an average of 1.4% from November 2014 to November 2017. Atlanta, the metro with the weakest real wage growth of -0.1%, saw modest wage gains during the same period. Despite strong real pay gains, in late 2017, real wage growth fell into negative territory for all 10 metros. The driver of these real wage declines is not increasing rates of inflation, but weakening wage growth.
It’s a surprising trend that economists will be watching closely in the coming months. What’s ahead? We expect this trend to reverse, with either stronger wage gains or softening inflation rates as we continue into 2018, bringing real wage gains back into positive territory for most of the country.
Source: Glassdoor (Glassdoor.com/research).
To go back to our original question: are wages keeping up with inflation? In theory, wage growth should track closely with inflation. Although we confirmed that it’s closely correlated across most big U.S. metro areas, inflation is outpacing wages due to wage growth that’s remained lethargic over the last few years. This is despite a strong labor market with an economy hovering near full employment Pay in many areas lagged behind the pace of inflation– causing real wages to fall for many American workers during the past year.
When can workers expect to see increases in paychecks? We expect inflation reverse course and wage growth catch up as the economy continues its upward path in 2018.
1. We used the latest available metro area inflation data from the BLS, from November 2014 through November 2017.