While strong wage growth for lower-income workers was a hallmark of the post-pandemic period, a new study by Kyle Fee of the Federal Reserve Bank of Cleveland shows that the dollar value result of that growth may not be as strong as the percentage change would suggest. Spotlight spoke with Fee recently; the transcript of that conversation has been lightly edited for length and clarity. Fee noted that the views expressed are his own and not necessarily those of the Cleveland Fed or the Federal Reserve System.
Kyle, let’s jump in and talk about your work. Wage growth for workers toward the bottom of the income scale was a hallmark of the period coming out of the pandemic. And your study shows that's continued, right?
Yes, Bill, that's correct. In my study, I look at real wage growth across the lower half of the wage distribution. And I find that real wage growth for lower wage workers exceeded real wage growth for higher wage workers from 2020 to 2025 in Q3. And it’s important to distinguish that that's on a percentage change basis. So, for example, workers at the 25th percentile saw real wages grow about 8% compared to workers at the 75th percentile, which saw real wages grow at 5.7% over this time period.
But there's a bit of a catch with that, correct? That's not translating into equivalent cash in hand and purchasing power.
That's exactly right. Despite the strong data that shows strong wage growth in terms of percentage change, we kept hearing from community members about difficulties that they're seeing for folks in the community trying to make ends meet. And our community issue survey also shows that the financial wellbeing of LMI households continues to decline.
So, what I do in my analysis is I actually look at the dollar amount of real wage growth. And when I do that, I find that the dollar value change might not be as robust as a percent change might suggest. For example, I previously cited an 8% growth rate for a worker at the 25th percentile. That translates to about an extra $1.50 an hour for that particular worker. That's roughly $10 to $15 extra a day, which is not nothing, but it's definitely less than one might expect when they hear of that larger percent change.
I should also point out that I find that the pattern of stronger wage growth amongst lower wage workers relative to higher wage workers flips. So, for example, as I noted before, a lower wage worker saw real wages grow twice as fast as a higher wage worker in terms of percent change. But when we look at the dollar value, a worker at the 90th percentile saw real wages grow a little bit more than $3 an hour compared to a worker at the 10th percentile. There we saw real wages grow about $1.35 an hour.
And what's the primary culprit there, Kyle? Is inflation the main driver of what you're finding?
Yes. Inflation is a big problem here and it eats away at a lot of the nominal wage gains that we saw during the pandemic.
And speaking of the pandemic, you also compare wage growth during the pandemic with wage growth from 2015 to 2020. Why did you do that and what did you find?
The pandemic is often cited as a period of growing prosperity among lower wage workers. But again, that doesn't often account for elevated inflation rates that we also saw. To make a claim that the pandemic was a great period for workers, we'd really need something to compare that to. And once we account for inflation, that really doesn't appear to be the case. I find that real wage growth during the 2015 to 2020 period actually exceeds growth during the pandemic in both terms of percentage changes as well as dollar values. And furthermore, I find that the current levels of real wages for workers in the bottom half of the wage distribution remain below where we'd expect them to be if trends from the 2015 to 2020 period continue.
So, going a little bit more into the present, we're in a turbulent economic period to say the least at the moment. How do you see economic trends thus far in 2026 either changing or bettering or worsening this wage trajectory?
We've seen that differences in wage growth across the wage distribution scale have narrowed in recent years and have generally stabilized or slowed to around 3.5% to 4%, depending upon which wage measure you're looking at. Inflation remains elevated and as of April 8 the Cleveland Fed is forecasting April PCE inflation to be at about 3.5%. And if that continues to be the case or increases over the remainder of the year, real wage gains will likely be smaller as inflation eats into that progress.
Are there policy prescriptions that lawmakers on both sides of the aisle should be looking at to try to address the situation that you find?
I think it stresses the importance of keeping inflation at the 2% level. I think that an important aspect of this pandemic period is that elevated inflation rates eroded those nominal wage gains. But when we look at the 2015 to 2020 period, we see relatively modest nominal wage gains and very, very low inflation. And as a result, we see real wage gains grow more in that period than they did during the pandemic.
Is there anything else you’d like to add Kyle?
I just wanted to elaborate a little bit more on why wages and income are an important part of the affordability discussion. I think that part of the discussion often overlooks wages and income as people tend to focus on price increases and elevated price levels. I think it's important to stress that affordability is ultimately a function of income and wages. And then I also think it's important for policymakers to consider the dollar value of change and not just the percentage change when evaluating economic progress, especially for low- and moderate-income populations. Understanding the dollar value offers a more tangible way for people to understand a household's financial situation. After all, household budgets are made in dollars and cents and not percent changes.