America’s Cost-of-Living Crisis Is Really a Pay Crisis
Affordability is everywhere in our national conversation, and for good reason. Housing costs are straining young families. Childcare is taking a painful bite out of many budgets. Grocery prices still sting at checkout. Oh, and gas just hit $4 a gallon. No wonder politicians are talking about lowering healthcare costs and changing laws to build more housing.
All these matter. But we're missing half the equation. If we're serious about making life affordable for working families, we also need to talk about the other side of the ledger: paychecks. And here's the truth: over the past 45 years, wage growth for most Americans has been halting at best, often failing to keep up with the country’s overall economic gains.
The labor market doesn't work the way intro economics textbooks describe, where fierce competition for workers drives pay to what workers are worth. In the real world, employers exercise considerable discretion in setting pay. Economists have a funny name for this—monopsony. But the idea is straightforward: companies can lower pay levels without triggering a mass exodus. Armed with monopsony power, employers tend to push wages down, unless there are countervailing forces. Unfortunately, as unions declined and labor protections eroded, little remained to push back. The result was a widening gap between what workers produce and what they take home. Companies increasingly chose business models that put shareholder interests and managerial pay over sharing gains with workers.
The issue underpinning America’s cost-of-living crisis isn’t just rising prices. The real culprit behind America’s affordability crisis is that employers have had too much power and too little motivation to share gains.
The impacts of wage suppression
The consequences of this imbalance are clear. The economy’s productivity grew by around 73% between 1979 and 2019, but wages in the middle rose only about 23%. Here is what this means in concrete terms. A retail worker in 1979 earned about $14.60 in today’s dollars. By 2019, that pay had risen to $17.40: only a 19% gain in an economy that nearly doubled in size. At the same time, earnings for the top 1% soared 169%. We had real economic gains, but much of it did not go to typical workers in this country.
This gap did not come about by accident. It was a consequence of corporate strategies that privileged shareholder returns over worker pay. It was also aided by the erosion of safeguards against corporate power, such as labor unions, and by policy choices that let the minimum wage wither. This is the missing link in the affordability debate. When wages don’t keep pace, price increases hit us harder. Households whose incomes have grown weakly for a generation feel a greater squeeze from rising rents and grocery bills, as it is harder to balance the family budget. We can’t just focus on one side of the ledger.
Potential solutions
The good news is that we have also had a glimpse of how we can do better. During the tight labor markets of 2021–2023, wages at the bottom grew faster than at the top, reversing roughly one-third of the inequality that had built up since the late 1970s. As workers left low-paying jobs for better opportunities, it increased competition, putting pressure on those employers to raise pay, countering monopsony power. And as workers moved to better positions, this also increased the overall productivity in the economy…a double dividend. Full employment is, in many ways, an elixir for labor market imbalances and a major pillar for rebuilding the wage standard.
Then consider minimum wages. We've been running a remarkable experiment in America. At this time, 20 states do not have a state minimum wage above the federal $7.25. Since almost no one is paid that low, it means that today, nearly half of America effectively has no binding minimum wage. The other 30 states, however, have instituted state minimum wages and have sometimes raised it substantially. What have we learned from this “natural experiment?” The evidence is clear. When minimum wage increases have appeared on state ballots, they have won nearly every time, in red, blue, and purple states alike. And in states that have raised their floors, workers have seen pay rise without the job losses often predicted by critics. Instead, companies see turnover fall and productivity rise as these jobs are made better. A combination of small price increases and somewhat lower profits helps businesses adjust to the higher pay. This is a timely matter: this June, voters in Oklahoma will decide whether to raise their minimum wage to $15 an hour by 2030.
What's also encouraging is the idea of setting pay standards more broadly, sector by sector, in nursing homes, hospitals, or the gig economy. Here, surprising facts about other countries' experiences, and even our own, point to new ways of boosting working- and middle-class pay. And states don’t need to wait for Washington. Some, like Minnesota and California, have already begun experimenting with sectoral boards to set pay standards.
As we confront new challenges, it is crucial to develop institutions that ensure economic gains are shared equitably. It is too early to tell how Artificial Intelligence (AI) will affect the labor market. Will it dampen wage growth by automating tasks? Or, as some research suggests, will it raise productivity and pay, especially for those with less experience and fewer qualifications? We don’t know, but here’s the important part. Either way, technology doesn’t share gains automatically: It depends on the choices we make. One example of what’s possible comes from the Writers Guild of America. After a lengthy strike, they won a sector-wide agreement with protection against AI displacement. This kind of standard-setting can safeguard the interests of American workers.
These days, it's easy to feel discouraged about the economy. So it's essential to remember: we're not stuck with the status quo. Shared prosperity is a choice, and we can choose to rebuild the wage standard for families across America.