The 2021–2023 inflation surge drove sharp, persistent price increases for consumer goods, housing and assets. Wage inflation rose too, but lagged other measures. When wages finally accelerated, the Federal Reserve raised interest rates to cool the economy, following its long-held view that wage growth can presage spiraling inflation and must be checked.
On the surface, average weekly wages over the past two decades sometimes appear strong, even outpacing general inflation, and data show real gains for many workers between the pandemic and late 2024. But these averages can mislead. Recessions disproportionately displace lower-paid workers, boosting averages when high earners remain; recoveries can temporarily raise averages through higher starting pay or signing bonuses. Common inflation metrics like the CPI often understate lower-income households’ cost of living, and most wages remain below pre-pandemic levels. Real hourly pay for many workers has barely budged since the 1970s and is slow to recover once fallen behind.
The Fed’s preoccupation with suppressing wage inflation is a relatively recent emphasis in its long institutional history. Created in 1913 to prevent banking panics and provide liquidity, the Fed’s remit expanded during the Great Depression to include monetary policy and bank supervision. The 1951 Treasury–Federal Reserve Accord restored its independence to set interest rates, enabling experimentation with monetary approaches.
By the late 1950s, economists relied on the Phillips Curve, implying a trade-off between unemployment and inflation: lower rates would spur hiring, lift wages and boost spending. That thinking held until the 1970s, when high government spending, deindustrialization and oil shocks produced stagflation—simultaneous high inflation and unemployment—exposing limits to traditional interest-rate policies.
After Congress formalized the Fed’s dual mandate of maximum employment and price stability in 1977, the central bank increasingly prioritized price stability. Under Paul Volcker in 1979, fighting inflation became paramount. Volcker and others viewed rapid wage growth—especially if driven by inflation expectations—as evidence of entrenched inflation psychology. If workers demanded higher wages to offset expected inflation and firms raised prices to cover costs, a wage-price spiral could take hold. The Fed’s remedy was steep rate hikes to slow hiring and weaken workers’ bargaining power—keeping unemployment sufficiently high to restrain wage growth while trying not to crush economic activity.
This strategy curtailed inflation but produced mixed social outcomes. Real wages stagnated for large swaths of workers even as the financial sector and asset prices grew under a regime that emphasized price control. By the 1990s, however, the Fed showed wage growth and price stability could coexist. Chairman Alan Greenspan allowed a hotter economy, betting that productivity gains from technology would restrain inflation. Unemployment fell and lower-income workers saw modest wage gains, while overall inflation stayed moderate in the 2000s and 2010s even as wages largely stagnated.
The 2020s inflation episode reflected different drivers: corporate markups, supply-chain disruptions and energy shocks played larger roles than wages. From the 1990s through the 2010s, wages were not a major inflation source; instead, asset bubbles and commodity price shocks accounted for many price increases. Yet the Fed’s machinery remained set to respond vigorously to wage growth, reinforcing an approach that tends to protect financial stability, support government borrowing and preserve confidence in the dollar—outcomes that disproportionately benefit wealthier households holding financial assets.
Other countries have pursued different paths. The Bank of Japan has actively sought higher wages to combat long-term stagnation and boost domestic demand. China has targeted asset-price excesses and encouraged minimum-wage increases to sustain consumption. Such alternatives show inflation management need not automatically equate to suppressing wage gains.
Economists have proposed various policy shifts for the U.S. Scott Sumner and Christina Romer have advocated nominal GDP targeting—stabilizing total dollar spending in the economy to avoid abrupt slowdowns and better sustain jobs and wages. Isabella M. Weber, Merle Schulken and coauthors warn of “seller’s inflation,” where dominant firms push up prices, and suggest targeted price controls in specific markets. Bill Mitchell and Warren Mosler propose a job-guarantee framework (NAIBER) where the government hires anyone willing to work at a fixed wage, anchoring prices while ensuring employment.
Broader reforms could help rebalance outcomes: widening inflation measures to capture corporate profits, rents and asset prices would better reflect where price pressures originate; policy could prioritize wage growth that keeps pace with productivity rather than merely tracking nominal pay, especially as productivity has been rising since 2023.
Achieving broad, lasting wage growth will be difficult. The post–World War II era’s broad-based gains reflected a unique mix of strong union bargaining, industrial expansion and macroeconomic conditions no longer present. Today’s economy tends to reward high-skill workers while lower- and middle-income households face intermittent gains and structural stagnation. The Fed’s long-standing focus on curbing wage-driven inflation has helped entrench these disparities by treating rising pay for typical workers as a threat rather than an economic strength.
Reassessing the Fed’s priorities—and considering alternatives like nominal GDP targeting, targeted price interventions, or a public job guarantee—could shift policy away from reflexively suppressing wages and toward measures that promote sustainable, equitable growth.
John P. Ruehl is an Australian-American journalist in Washington, DC, and a world affairs correspondent for the Independent Media Institute. He contributes to several foreign affairs publications; his book Budget Superpower: How Russia Challenges the West With an Economy Smaller Than Texas was published in December 2022.
This article was produced by Economy for All, a project of the Independent Media Institute, and is reproduced with kind permission.
