Employment Surges in July but Inflation Continues to Erode Wage Gains for Americans

In the first month in which half of states have phased out pandemic supplements to unemployment benefits, job growth soared. Today, the Bureau of Labor Statistics (BLS) reported that in the month of July, the economy added 943,000 jobs while the unemployment rate plummeted by 0.5 percentage point to 5.4 percent, the lowest rate since the recovery from the pandemic began. Perhaps most importantly, the BLS reported that the labor force participation rate and the employment-population ratio both increased in July—by 0.1 and 0.4 percentage point, respectively—indicating greater overall participation in the job market among Americans. Despite this good news, it remains the case that average real wages likely continued to decline for the seventh consecutive month—the longest such streak since at least 2006.

With the strong gains in July, the total number of Americans working is now just 5.7 million, or 3.7 percent, below the level on the eve of the pandemic. The pace of this recovery, which began in May of 2020, is extraordinary given the severity of the contraction at the worst of the pandemic (figure 1). The strength of the pre-pandemic economy and the success of the Trump Administration’s initial actions in response to the pandemic in the spring of 2020 continue to serve as the foundationupon which this continued labor market recovery rests. Additionally, throughout June, 25 states¹ ended participation in the Federal Pandemic Unemployment Compensation (FPUC) program—the $300 federal supplement to state unemployment benefits—making July the first month of employment data when many Americans no longer had access to these overly excessive benefits. While state-level data is not yet available to measure the precise impact that ending these benefits had on the July employment figures, initial data showed that ending the FPUC may play a substantial role in many Americans returning to work this summer.

Inflation continues to stymie the economic recovery, especially as it persists at a higher rate than average nominal wage growth. As the cost of living—as measured by the Consumer Price Index (CPI)—rises at a faster clip than wages—as measured by nominal average hourly wages—the ability for the average American to pay for goods and services is declining rapidly.

Real wages thus account for the cost of living and are a better measure of Americans’ purchasing power than the nominal wage. Although average nominalwages increased by 0.4 percent in July, the likely² average real wage decreased by 0.4 percent. Real wages have declined in every month so far this year, with July marking the seventh consecutive month of decline. This marks the longest such streak of monthly real wage declines since at least 2006. While nominal average wages have grown at a 3.6 percent annualized pace so far in 2021, the 7.7 percent annualized increase in the CPI has resulted in a 3.7 percent decline in real wages through July. Conversely, in the final three months of 2020, nominal wage growth outpaced the rate of inflation, resulting in real wage gains of 3.4 percent at an annual rate (figure 2). The persistence of real wage declines under President Biden poses a substantial threat to labor force participation and a full labor market recovery. It is therefore vital that the administration considers the impact of its proposed fiscal policies on the rate of inflation as 8.7 million Americans remain unemployed.

Today’s report from the BLS should be celebrated as nearly 1 million Americans returned to work. This momentum must continue, as the recovery is far from over. Federal or state policies that disincentivize a return to work, that disincentive businesses from investing in new projects and equipment, that risk continued heightened inflation, and that limit economic activity amid failed efforts to mitigate the spread of future pandemic variants threaten to bring this unprecedented recovery to a screeching halt and subject the American people to the stagnation of the pre-2017 era.

Cale Clingenpeel is the Chief Economist at AFPI. Previously he served as Senior Adviser to the Chairman of the White House Council of Economic Advisers.

¹Since ending participation in the FPUC program, lawsuits in 3 of these 25 states have resulted in the reinstatement of FPUC until the legislated end to the program in September.

²Inflation data for the month of July is not yet available. To measure real wage growth in July, we assume that the Consumer Price Index (CPI) will increase in July at the average pace set over the prior 3-month period (April—June).