Nominal Wage Adjustments during High Inflation and Tight Labor Markets

Abstract

The U.S. economic recovery after COVID has been characterized by relatively high inflation and low unemployment. At the same time, average wages increased at a rapid pace during this period, faster than in previous years. Grigsby, Hurst, and Yildirmaz (2021) study nominal wage rigidity in the United States and document that before the pandemic, wage declines were rare and over 35 percent of workers would not receive a wage increase year over year. Given the larger-than-usual aggregate wage growth in the aftermath of the pandemic, we revisit these results and study the frequency and the magnitude of individual wage changes in a context of high inflation and tight labor markets. We find that individual wages increased more frequently and by a larger amount post-2021, but the pace and frequency of the increases moderated somewhat in 2023 compared to the previous year.

Introduction

In an influential recent article, Grigsby, Hurst, and Yildirmaz (2021) study nominal wage rigidity in the United States, using administrative microdata from a large payroll processing company. They document that for the pre-pandemic years, wage declines were rare and over 35 percent of workers did not receive a wage increase year over year.

The U.S. economy in the aftermath of the COVID-19 pandemic has been characterized by high levels of inflation and low levels of unemployment. At the same time, average wages increased at a rapid pace during this period, faster than in previous years. We study the evolution of the monthly consumer price index (CPI) and the average hourly earnings for private workers from 2016 to the present, with the series indexed to January 2020 being equal to 100. Between January 2020 and December 2023, wages grew at a rate of 4.8 percent per year, while consumer prices grew at 4.5 percent, on average. In contrast, between January 2016 and December 2019, they grew at 2.8 percent and 2.1 percent, respectively. Thus, both average wages and inflation increased at a faster pace since 2020.

The pace of aggregate wage changes since 2020 differs from the one observed before the pandemic. In this article, we study whether the frequency and the magnitude of wage changes at the individual level have also differed during these years of high inflation and tight labor markets. In other words, we study whether the documented nominal wage rigidities at the individual level change with economic conditions.