Wages spike in the pandemic — but it’s just a fluke
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The December jobs report from the U.S. Labor Department is expected to show continued strong wage gains compared to the pace of gains in the pre-pandemic economy. In November, average hourly earnings rose 4.4% year over year, compared to 2.9% in February 2020.
And earlier in the pandemic, wage gains were even stronger, peaking at 8% year over year in April 2020 — after the economy had shut down and more than 20 million people had lost their jobs.
“What that was, was noise, not signal,” explained Joseph Brusuelas, chief economist at RSM, a consulting firm focused on small- and middle-market businesses.
Brusuelas said that fast-rising wages have been a statistical anomaly of the pandemic economy. While most higher-paid professionals have kept working from home and held on to their paychecks, millions of lower-paid service workers have lost their jobs and income.
“When you’ve got 40% of households making $40,000 or less seeing a job loss or loss in wages — that explains that ‘head fake,’ if you will, on wages,” Brusuelas said.
Cinnamon Deutsch, a 40-year-old preschool teacher in Ashtabula, Ohio, is exemplary of this dynamic playing out. When the child care center where she works shut down in March, she was laid off. Her $350-per-week paycheck disappeared from the average hourly earnings calculation in the national wage data.
But at the same time, she got unemployment benefits. Through the spring, that included an extra $600-per-week benefit for all recipients under the Federal Pandemic Unemployment Compensation program. She kept getting those payments until the child care center reopened in June and she was called back to work.
“I made twice as much on unemployment — with the extra $600 — as I do now,” Deutsch said. “But I am glad to be back to work. I mean, I like going to work.”
Like many Americans, Deutsch saw her income rise significantly early in the pandemic because of pandemic unemployment benefits and relief checks that Congress provided under the CARES Act. Nationally, personal income shot up 14% year over year in April before falling back to pre-pandemic levels by late fall.
Joseph Brusuelas predicts that as the short-term wage and income gains of the pandemic fade away and the economic recovery gathers steam, Americans are in for a rude awakening.
“I think we’re going to see a very bifurcated wage market, a K-shaped economy, separation between the haves and have-nots,” Brusuelas said.
He said the “haves” — those who work in what he dubbed the “Zoom economy” — will have it made. “Those at the upper end, those who are already thriving, there’s going to be competition for those workers and a premium placed on their wages.”
But for lower-wage service workers, he said, even as the economy reopens and employers start staffing up again, “Those in the middle to lower end of the market, where the damage occurred, they’re not going to see a lot of wage growth.”
That’s due in part to supply and demand: Millions of unemployed workers looking for jobs, and not enough job openings in the labor markets where they live to give them leverage to demand higher pay.
Another factor at play is something economists call downward nominal wage rigidity. Brusuelas explained the consequences this way: “During hard times, firms tend not to reduce the wages of the employees that they keep on the books. But when the times get better, wage gains are restrained.”
That matches up to what Cinnamon Deutsch has experienced.
Deutsch is back at work full time at her child care job, at her previous salary of $350 per week. The extra income she banked in the spring from receiving a weekly unemployment check in excess of $800 per week has run out.
“My credit card is back up to almost maxed out. I’m trying to pay $5 or $10 bucks extra so I can pay that down,” Deutsch said. “I make enough money to pay my bills and have McDonald’s once in a while. But I know that if my car breaks down or if I have an emergency, I’m just out of luck. I have to borrow from somebody.”
Deutsch said she doesn’t expect to get a raise until she’s completed 10 years of service — in 2023.
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