THE LOW-WAGE PAY SURGE IS OVER, THREATENING THE CONSUMER BOOM / THE WALL STREEET JOURNAL

The Low-Wage Pay Surge Is Over, Threatening the Consumer Boom

While a loosening labor market is cutting into the leverage and spending power of workers at the bottom, they aren’t moving backward

By Amara Omeokwe

More workers are seeking jobs, and the economy is feeling the impact of the Federal Reserve’s fight against inflation. PHOTO: FREDERIC J. BROWN/AGENCE FRANCE-PRESSE/GETTY IMAGES

Low-wage workers were the labor market’s surprise winners of the past few years. 

As employers clamored to hire from a limited pool of workers, Americans in lower-paying industries gained leverage to obtain some of the largest pay raises and perks. 

Government relief during the pandemic padded those workers’ finances.

Now, that leverage is weakening. 

More workers are seeking jobs, and the economy is feeling the impact of the Federal Reserve’s campaign to combat inflation. 

That has resulted in slower wage growth overall, but particularly at the lower end of the pay scale. 

Pandemic-era savings cushions are growing smaller. 

Retailers are noticing low-income consumers pull back, and economists expect this to cool an exceptionally strong streak of consumer spending, though they don’t see an outright bust.

Workers in the bottom quarter of the wage distribution received a 5.9% raise in October compared with a 7.2% increase in January, according to data from the Federal Reserve Bank of Atlanta.

Workers overall saw a smaller decline over the same time frame, from growth of 6.3% to 5.8%. 

The measure is based on the 12-month moving average of median wage growth, on an hourly basis.

Leisure, hospitality workers see wage slowdown

Average hourly wages in leisure and hospitality, often viewed by economists as a proxy for lower-wage work, were up 7% from a year earlier at the start of 2023, according to Labor Department data. 

That had eased to 4.5% by last month. 

Wage growth for private-sector workers overall slowed by a much smaller 0.3 percentage point over the same period.

April Kuhlman, of St. Petersburg, Fla., benefited from tight labor-market conditions in recent years. 

She left a job at a quick-service restaurant in early 2021 for a job working at a spa. 

She initially made $9 an hour at the front desk, then worked her way up to assistant manager by the end of 2022. 

Her pay at the spa has risen over time to $21.  

“I’m trying to grow within this company that I work for now, and I’m much happier here than I was making food in the kitchen all day,” she said. 

Yet in her new role recruiting and training new staff, Kuhlman, 33 years old, said she sees how much the hiring landscape has changed now from pandemic times, when the spa struggled to find workers. 

“We’ve been kind of flooded with résumés and people walking in to apply,” she said. 

“We’re able to be picky, because we have so many different people to choose from.” 

Pay raises have grown smaller in the leisure and hospitality industry, a sign of weakening leverage for low-wage earners.   PHOTO: ANGELA WEISS/AGENCE FRANCE-PRESSE/GETTY IMAGES

In a reflection of how things have shifted, the spa stopped offering sign-on bonuses as an incentive for potential new hires, Kuhlman said.  

Americans accumulated roughly $2 trillion in excess savings during the pandemic. 

Forecasters expect the resulting boost to spending to fade as people exhaust that stash, although estimates of when that will happen vary. 

Going forward, low-income households, in particular, will instead have to rely more on income growth and borrowing to support spending, said Bob Schwartz, a senior economist at Oxford Economics. 

Turning to credit cards

Indeed, U.S. credit-card debt rose by $154 billion in the third quarter from the same period in 2022, not adjusted for inflation, the largest increase on records back to 1999, according to the Federal Reserve Bank of New York. 

But borrowers are showing strain: The share of credit-card users who became newly delinquent, or 30 or more days behind on at least one account, was higher than the prepandemic average during the third quarter, according to New York Fed research. 

Delinquency rates are rising fastest in lower-income ZIP Codes, the research found.

“Since they have less of a cushion and less of a savings buffer, this will translate into slower spending,” Schwartz said of low-income earners.

McDonald’s share of industry traffic from low-income consumers was down during the third quarter from a year earlier.  PHOTO: JUSTIN SULLIVAN/GETTY IMAGES

Some companies are seeing that already.

McDonald’s Chief Executive Officer Chris Kempczinski said on an October earnings call that the company’s share of industry traffic from low-income consumers, those with yearly incomes of $45,000 or less, was down during the third quarter compared with a year earlier. 

“We’ve been talking about how the consumer is more discriminating because of all of the price pressures that they’re facing, as well as interest rates,” Kempczinski said. 

“What you end up seeing is that the pressure is felt more on the lower-income consumer.”

Foot Locker CEO Mary Dillon said in August that “the full weight of the macro environment on our lower-income consumer” became much more evident during the company’s second quarter, affecting the back-to-school shopping season. 

Meanwhile, Gap in August said its Old Navy value brand was seeing continued slower demand from lower-income consumers. 

Budget airlines have also been seeing a pullback in demand. 

While the fortunes of low-income households aren’t as upbeat as they once were, they aren’t going into reverse. 

Indeed, with inflation easing, wages have been rising faster than prices since mid-2023. 

Still beating inflation

“What we really care about is changes in the standard of living,” said Elise Gould, senior economist at the left-leaning Economic Policy Institute. 

“How are low-wage workers doing? 

Their wage growth is coming down, but inflation has been coming down quite fast. 

And so they were beating inflation before, and they are still.”

But Gould said should even a mild economic slowdown emerge, it could hit low-wage earners hardest, since they are less likely to have wealth buffers to fall back on. 

Pandemic relief measures, such as the expanded child tax credit and stimulus checks, which were aimed at benefiting low-income households in particular or limited eligibility by income, have expired and there could be limited appetite among Washington policy makers for their renewal, even in a new downturn. 

Arindrajit Dube, a professor of economics at the University of Massachusetts Amherst, and co-researchers found in a study that a tight labor market after the height of the pandemic led to disproportionate wage growth at the bottom.  

Inflation-adjusted hourly earnings at the 10th percentile of the wage distribution rose 8.1% between January 2020 and June 2023, while those at the median rose by 1% and those at the 90th percentile fell by 1.5%, the researchers found. 

They estimate 40% of the rise in wage inequality since 1980 between the 10th and 90th percentiles has therefore been reversed.

Dube said wage inequality only narrowed a bit more between the third quarter of 2022 and the second quarter of 2023, but didn’t reverse. 

“The reduction in wage inequality that we find seems to be leaving a more permanent mark, as opposed to something that lasted a few years and goes back to the way things were,” Dube said.