You probably took a pay cut last year

Adjusted for inflation, you probably took a pay cut in 2022. In fact, most Americans did. 

In 2022, the costs of goods and services in the United States rose by more than 6%, on average. However, most workers did not get a 6% raise to keep up with this rising cost of living. When adjusted for inflation, hourly earnings decreased by 1.7% from December 2021 to December 2022, on average. 

Last week the Federal Reserve met and announced an eighth consecutive rate hike, this time by one-quarter of a percentage point, in an effort to bring down inflation.

Fast Company spoke with three economists about how paychecks fared in 2022 and about how much (or how little) power workers have in the year ahead:

Paychecks did not keep up in 2022—for most

While workers’ wages did not keep up with the pace of inflation overall, economists suggest that there are several subtleties to this economic picture. 

“Inflation has been quite high over the last year and that has eaten away at many paychecks, says Elise Gould, senior economist at the Economic Policy Institute. “But if we look more recently though, there is a bit of a more nuanced story.”

Alexander Colvin, Dean of the School of Industrial and Labor Relations at Cornell University explains that when adjusted for inflation, wages eroded during the first six months of last year. “Then things switched around July onward. As inflation has been dropping over the last six months, wage gains have been slightly higher than inflation overall,” he says. “Wages have started to rebound and regain some of the ground lost in the first half of  the year. They haven’t come all the way back yet, but we’ve started to see a turnaround.”

Gould adds that while real wages fell for workers on average, some workers made gains. “We actually have seen some wage compression over the last year, which means that lower wage workers are actually seeing faster growth than middle or higher wage workers. And so those that are struggling the most actually did see gains,” she says, pointing to employment and pay progress among low-income workers, young workers, and Black workers. 

This happens often 

In October, economists at the Federal Reserve Bank of Dallas reported that the majority of employed workers’ real—or inflation-adjusted—wages failed to keep up with inflation over the last year. “For these workers, the median decline in real wages is a little more than 8.5%. Taken together, these outcomes appear to be the most severe faced by employed workers over the past 25 years.”

But through this historical analysis, researchers also found that nearly half (44.6%) of workers experience negative real wage growth every year. “It’s not that typically, wages keep up for most workers and it didn’t this time,” Joseph Tracy, senior advisor at the Dallas Federal Reserve and one of the authors of this research. “It’s that typically wages don’t keep up.”

“It’s a bummer,” says Gould in response to this research. “That doesn’t speak so well for the labor market.”

Reasons for cautious optimism

Still, the economists who spoke with Fast Company said there are reasons for cautious optimism. Tracy says there are opportunities for public investment in education, research, and development that could increase worker productivity and eventually help boost paychecks. 

Gould says the FTC’s recent proposal to ban non-compete clauses could give workers more freedom to find higher paying jobs. She also suggests that retrospective pay data may eventually reflect workers who found higher paying jobs during the Great Resignation. 

And Colvin says there are signs that the Fed may successfully be taming inflation without pushing the economy into a recession. 

“A soft landing seems more plausible now than it did six months ago. That’s the best path forward and hopefully we’ll see a return to moderate real wage increases,” he says, adding that workers can, and should, ask for cost of living adjustment. “I’d be asking for something, but I would be, you know, be realistic. Don’t shoot for the moon.”