Analysis finds pay increases still lag behind the rising cost of living

Spending power declined for many Americans even as wages rose, according to an analysis from the Ludwig Institute for Shared Economic Prosperity (LISEP), a nonprofit research organization.

The report found that in most of the nation’s largest metropolitan areas, middle- and lower-income households saw their purchasing power fall, with 61% of the 56 largest metropolitan statistical areas affected in the most recent year for which complete localized data was available.

Housing, childcare and healthcare were identified as the main forces pushing costs higher, echoing other reports that have documented steep increases in those essentials.

The cost of living climbed 4.7% in the most recent year cited, above the average annual increase of 3.2% since 2005, the LISEP analysis said. Childcare costs rose 7.6% on average, while healthcare costs increased 2.9%.

“This analysis reminds us that rising wages, by themselves, don't tell us whether people are actually better off,” LISEP Chair Gene Ludwig said in a statement. “What matters is whether incomes are keeping pace with the cost of living.”

Employers are still planning relatively modest pay increases, according to a report from Marsh, which found that base salary merit increases were expected to average 3.2% and total salary increases, including merit, promotions and cost-of-living adjustments, were expected to reach 3.5% in 2027. If those projections hold, it would amount to four consecutive years of moderate compensation growth, a Marsh workforce reward solutions leader said.

Healthcare costs are also influencing compensation decisions. A separate report from the National Alliance of Healthcare Purchaser Coalitions found that 83% of employers said rising healthcare expenses are forcing tradeoffs with wage and salary increases, while 93% expect to shift some of those costs to workers.

Worker expectations are changing as well. More than four in 10 employees said they believed they were more likely to get a raise by leaving and returning to their company than by staying, according to a Marsh report, up from 18% the previous year.

Gartner said workers increasingly want protection from unexpected expenses, especially medical bills, and place high value on benefits that support financial security and stability.