A new St. Louis Federal Reserve Bank analysis of second-quarter earnings and expenditure data show that factors like age, education, demographic and gender modify the effects of inflation on individuals and households. It also identifies a reversal in a decade-long pattern of positive real wage growth, which left most workers to combat rising inflation with negative real-wages.
Not surprisingly, higher education has a mitigating effect on real wage growth. While all educational groups –(Less than HS diploma, HS graduate, Some College, Bachelor’s+) saw negative real wage growth in 2021 and 2022, those with bachelor’s and graduate degrees felt the lowest impact of negative wage growth (-2.8%) than any other educational cohort. People with some college – which includes associate degrees – were slightly more impacted (-3.1%). High school graduates saw negative wage growth of -3.3%, and workers who lacked a high school diploma saw negative wage growth of -3.5%.
If nothing else, rising real wages offer a good incentive to complete at least an associate degree. The more education a person has, the more likely that person is to achieve positive real wage growth, so the better one can protect earnings from the impact of inflation. Of course, every individual is different, but as a group, people with higher levels of educational attainment fare better in terms of real wage growth when inflation rises.
During the study period (2021 and 2022), the only cohort to experience real wage growth were persons under the age of 25. First jobs, job switching, and attaining post-secondary degrees and certifications likely account for the real wage growth among these individuals.
WCC could target groups with lowest real wage growth
Individuals over the age of 54 experienced the lowest level of real wage growth (-4.8%). That’s also expected among people who may be retiring or semi-retiring at this age. Among this cohort are also people who may have lost their jobs without being ready to leave the workforce voluntarily. Prime age workers – those between the ages of 25 and 54 – saw negative real wage growth of -3.4%.
Inflation and real wage growth also had a higher negative impact on people with children in their households. At -4.7%, the real wage growth of this demographic group nearly mirrored that of workers 55 year of age and older.
Additionally, the Fed looked at the impact of changing jobs on income and inflation. Those who switched jobs were less impacted by inflation than those who remained in their position. There is a HUGE caveat here, though. People in low wage positions – those in the 25th percentile or lower of earners – fared worse when using job-switching as a technique to increase their earnings. Most workers whose earnings were in the 50th percentile benefited marginally from switching jobs. Job switching as a means to collect a higher wage offered the most benefit to individuals in the 75th percentile of earnings.
Finally, the Fed looked at the impact of inflation by household income, household size, educational attainment and age. Workers who had the lowest educational attainment and the youngest workers were most negatively impacted by inflation. Low educational attainment levels produced the highest negative inflationary effects.
To recap: post-secondary degrees have real economic value in periods of high or unstable inflation. Negative wage growth disproportionately affects households with children and older workers. Job switching by itself doesn’t always produce the desired results, and the youngest and least educated earners are most negatively affected by high inflation.
Washtenaw County needs a better focus on low-earning households
These are all great reasons to promote degree completion and support strategies (like job switching) to mitigate the effects of negative wage growth and inflation. The Fed data also identify target populations who would most benefit from high-wage, high-demand training. Households with children and non-prime-age workers who are not ready to retire clearly need assistance in mitigating the impacts of inflation. Young workers with low educational attainment levels could also benefit from education and training programs that would help lift them above the 25th percentile earnings threshold.
To be clear, in 2023, $38,000 was the 25th percentile threshold in terms of household earnings. If that number sounds familiar to you, the average WCC student currently earns $39,000 ten years after first enrollment at WCC. That’s the 26th percentile, so technically, these students clear the low bar that the 25th percentile sets, but not by enough to live in Washtenaw County. (The average household income in Washtenaw County is in the 60th percentile. In comparison, Ypsilanti’s average household income is in the 29th percentile.)
We need a better focus on creating real opportunities for people whose household incomes fall below the 50th percentile.
Photo Credit: George Thomas
