Real Wages Fall for 40% of Workers, Feeding Gloom

Americans are earning more on paper but still falling behind. Consumer sentiment, as measured by the University of Michigan's monthly survey, remains worse than it was during the COVID period. The culprit: inflation has exceeded wage growth for four straight months.

"Consumers' frustration over the erosion of their purchasing power continues to mount," Joanne Hsu, director of the university's Surveys of Consumers, said.

The survey found almost three-quarters of consumers in August expected price growth to outpace their income growth over the next year. Hsu said many people worry that higher energy prices will spill into other parts of the economy. A sustained drop in gasoline prices over several months, she added, "would go a long way in boosting consumer views of the economy."

A new working paper from the University of Chicago Booth School of Business and ADP Research offers a deeper look at why the gloom persists. The researchers, including ADP's Nela Richardson, used ADP payroll data through 2025 to track purchasing power. They found that the unexpected inflation spike after the pandemic caused a "persistent downward shift in real wages." Real wages fell between December 2020 and 2024 for nearly 40% of workers. Before the pandemic, that share was roughly 24%.

"Inflation has slowed, but many people never fully recovered the purchasing power they lost when prices surged," Richardson said in a blog post.

She noted that a 3% raise used to deliver a modest real income gain before the pandemic. When inflation jumped in 2022, employers gave raises that didn't keep pace. Bonuses helped little. Off-cycle raises moderated declines for job stayers, but the overall picture remains weak.

Mark Hamrick, chief economic analyst at The Hamrick Brief, said persistently high inflation above the Fed's 2% target is feeding Americans' pessimism. "Americans are literally paying the price for high inflation through elevated price levels," he told Business Insider.

Nicole Bachaud, an economist at ZipRecruiter, put it bluntly: "Even if you're making more money numbers-wise, with the way prices are rising, you have less money left over at the end of the month." She said middle- and low-income households, which depend most on wage growth, feel the squeeze hardest.

Hamrick said the problem goes beyond inflation. The wealth divide means those without substantial assets are constantly reminded of the gap. "At the end of the day, it's affordability challenges and a growing wealth divide that ends up disenfranchising a good number of people," he said.

ADP, whose payroll data underpinned the research, carries an Alpha Score of 61 out of 100, indicating moderate momentum in the industrials sector. (See the ADP stock page for details.)

Hsu pointed to one potential near-term salve: a sustained drop in gasoline prices. But that would need to last months, not just days. Crude oil prices remain a wildcard for consumer sentiment. (Track the crude oil profile for updates.)

Hamrick said sustained wage gains adjusted for inflation would help mitigate the problem. "That hasn't been happening in aggregate," he said. "A number of people are being taken financial prisoner by that."