Did you get a pay cut without knowing it?

Inflation is outpacing wage growth, diminishing buying power.

by Hannah, published 05/05/2014
Did you get a pay cut without knowing it?

PayScale recently published data showing that inflation has caused "real wages" in the U.S. to decrease by almost 7 percent since 2006, despite wages having increased by 7.4 percent. “In other words, the income for a typical worker today buys them less than it did in 2006,” says Katie Bardaro, lead economist at PayScale. And in fact, higher compensation is the top reason an employee would choose to leave an employer, according to a U.S. poll conducted on Monster.com.

The industries hit the hardest by the decrease in the buying power of wages were accommodation and food services with real wages down by 10.3 percent from 2006, construction with real wages down 10.6 percent, and arts, entertainment and recreation with real wages down 11.2 percent.

“Construction was directly hurt by the Great Recession due the burst of the housing bubble having serious repercussions on new buildings, both commercial and residential,” Bardaro says. “The other two industries are hurt during recession because they depend on discretionary spending. These are costs that consumers usually cut back on during hard times and thus demand for their services drops.”

Other industries saw smaller losses: Health care and social assistance real wages dropped 6.7 percent, and utilities’ real wages were down 6.9 percent. Mining, oil and gas exploration saw an increase of 1.7 percent since 2006.

The reason for the minimal impact on the real wages of these industries boils down to need, Bardaro says. “Both mining and utilities are bolstered by strong revenues in those industries,” she says. “Even when people feel the pinch, they still demand gas and power, so these industries weren’t hurt in the same way as others. The same is true for health care as well. Demand for health care doesn’t decrease because economic times are bad and in fact, it has increased in recent quarters due to the ACA, as well as the aging population.”

Besides the blow to industries lying outside the realm of necessary expenses, technology might also be a culprit in the decrease of buying power, executive coach Roy Cohen suggests. “As new and exciting technologies emerge, individuals with the right skill set have stayed whole with respect to compensation,” Cohen says. “On Wall Street, for example, many of the functions historically performed by traders have been automated. As a result, their value add has virtually disappeared as well as the potential to earn outsized commissions. It may feel like a pay cut but it is really a byproduct of supply, demand and technology."

The data shows the value of real wages dropping drastically in 2008, during the Great Recession, when inflation increased by more than 3 percent as wages only grew by about 1 percent, Bardaro says. As a result, paychecks buy less than they did in 2006.

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