The money illusion in the South: Employers raise wages, but retail prices continue to rise faster

 Employment Cost Index - 12-month increase

Private Industry Workers' Wages and Salaries in the South

Current Dollars

Constant Dollars

Private industry costs for wages and salaries in the South rose 2.2% for the 2^nd quarter (April-June) 2022, according to new information provided by the U.S. Bureau of Labor Statistics.  The increase occurred following increases of 1.0% in the 1^st quarter of 2022 and 0.7% in the 4^th quarter of 2021.

Over the past 12 months, southern employers’ payout of wages and salaries has risen 5.9%, the largest percentage increase in the series, which dates back to 2001. For private sector workers in the Atlanta-Athens area, the 12-month increase was 4.4%.

In comparison, nationally, private industry wages and salaries rose 1.6% in the 2^nd quarter following increases of 1.4% and 1.0% in the previous two quarters.  Over the past year, employers’ cost for wages and salaries rose 5.7% for the nation.

Adjusting for inflation

While employer wage costs rose, they continued to fall behind the inflation rate of retail prices. Southern employers in private industry saw their costs for wages and salaries decline 1.0% over the quarter and 3.6% over the year when the dollars were adjusted for inflation.

For the U.S., private industry employers saw wages and salaries drop 1.4% over the quarter and decline 3.1% over the past 12 months when including adjustment for inflation.

Using another way of expressing the change over time for wages and salaries of private industry workers in the South, over the past 10 years, nominal (before inflation adjustment) wages have increased 31.3%.

Including the impact of inflation, this increase falls to a 1.8% cumulative increase over the past decade.

 Money illusion

One of the insidious effects of inflation is that workers see increases in their paychecks and feel wealthier even as their purchasing power declines. As a result, workers continue to spend based on their increasing nominal wages even though they are actually able to purchase less. This continuing propensity to spend actually contributes to inflation remaining elevated for a longer time period.

Only when inflation hits high levels will workers adjust their spending and/or begin to demand higher wages to compensate for their declining purchasing power.