Economic Perspectives - 06/05/26

While inflation has dominated the headlines, especially as it relates to the financial stress it is creating for the lower wage earners, the untold positive story is that the lower wage earner is quietly winning over the higher wage earners when it comes to real wage growth. Since the 1st quarter of 2010, real wage growth for the bottom 25% of wage earners has grown at least twice as fast as the top 25% when measured on a 12-month moving average. Currently the bottom 25% are experiencing real wage growth, which is 2.3 times faster than the top 25%. The good news is that the wage gap is incrementally closing. Even though the gap between actual monthly wages remains wide, the faster real wage growth of the bottom 25% could provide faster economic stimulus as they will most likely spend the increase in earnings while the top 25% will most likely put the increase to savings or investments.

The Atlanta Federal Reserve maintains data on wage growth via its Wage Growth Tracker Index. This index calculates the nominal wage growth (growth before subtracting inflation) of individuals, matching the same 12-month interval from the Bureau of Labor Statistics (BLS) Current Population Survey, and breaks the data down by wage percentiles. Real wage growth is then calculated by subtracting the growth in the Consumer Price Index. Tracking real wage growth helps us understand the impact to the average consumer's purchasing power.

Let us start by examining the growth rate of real wages since the 1st quarter of 2010. This will help give perspective on what the trend looked like during the last economic expansion (2010-2019), the pandemic distortion, and the economic expansion since the end of the pandemic distortion. What we discover are four trends.

• The sluggish start to the expansion after the financial crisis (2010-2014). 

  • Essentially, since businesses had a large pool of applicants for jobs coming out of the Great Financial Crisis recession, wage growth was slow with growth ranging between 0.2% and 1.5% real growth. You can see from the graph below that the real wage growth for the upper 25% of wage earners consistently outpaced the bottom 25% during this period as specialized roles were in higher demand than jobs in the service sector.

• The tightening of the labor pool from 2014-2019. 

  • By 2019 there were more job openings than unemployed people. As a result, businesses had to compete for labor. Workers at the lower end of the pay scale benefited from this more than the upper end. The graph shows is that since 2014 real wage growth has consistently been faster for the bottom 25% of wage earners than the upper 25%.  

• The pandemic crisis distortion.

  • After the pandemic crisis ended, labor shortages were an issue as fiscal stimulus (i.e., extended unemployment benefits, stimulus checks and moratoriums of rent, mortgage payment, and student loan payments) created a dis-incentive for people to return to work, especially the lower wage earners. This was a double “whammy” for businesses because demand for services surged when the economy re-opened after the COVID shutdown. Many economists framed this surge as “revenge spending” as people had money from the fiscal stimulus and spent much of it on services (restaurants, hotels, travel, visits to medical providers, etc.). These types of services (Leisure & Hospitality and Healthcare & Social Assistance) are where many of the lower paying jobs reside. The constrained supply of labor and the increase in demand for services resulted in faster wage growth for the bottom 25% of wage earners. 

• The post-distortion cooling.

  • As the fiscal stimulus played out, revenge spending finished and higher interest rates and fiscal policy created elevated uncertainty, demand for labor slowed and real wage growth slowed.

The second graph shows the historical trends for the growth gap (i.e., the percentage point growth differential between the bottom and top 25%). The graph below illustrates the surge/distortion that was created from the fiscal stimulus during the post-pandemic distortion between 2021 and 2023. At its peak, the gap between the real wage growth of the bottom 25% of wage earners compared to the upper 25% was 2.4 percentage points. As inflation cooled, interest rates rose, and fiscal policy created uncertainty, job hiring slowed to the point where the nation barely added jobs in 2025. The area of jobs growth was primarily in the Healthcare & Social Assistance sector. Again, this is where many of the lower paying jobs reside. The continued demand for hiring in the lower paying jobs resulted in higher real wage growth. The declining demand for higher paying jobs-especially with job losses in the technology industry-resulted in real wage growth slowing more for the upper 25% of wage earners compared to the bottom 25%. The gap steadily declined from the second half of 2023 through the most recent date (1st quarter 2026). The important thing to observe is that the gap has remained positive for the bottom 25% of wage earners.

Some might argue that this is not really good news because the bottom 25% are still making a lot less money than the upper 25%. While true, the gap is narrowing. If we use the example of the highest paying industry sector (Utilities) versus the lowest paying (Leisure & Hospitality), the incremental improvement exists. As of 4/30/26, the Utilities sector pays $2,393 per month, Leisure & Hospitality sector pays $601. A 0.3% increase on $2,393 is a $7.18 increase in monthly pay. A 1.9% increase on $601 is an $11.42 increase in monthly pay. For the bottom 25% that most likely provides immediate additional income that is spent on essentials. Every additional dollar matters for the bottom 25% of wage earners and thus the incremental increase in real wages is positive for them.