Center for American Progress

Wages and Employment Do Not Have To Decline To Bring Down Inflation

Wages and Employment Do Not Have To Decline To Bring Down Inflation

To lower inflation, policymakers must continue using fiscal policy to focus support to struggling households, improve the economy’s productive capacity, create more resilient supply chains, and limit the profiteering of corporations.

People, blurred, walking past the Federal Reserve building, which is in focus
Pedestrians walk past the U.S. Federal Reserve in Washington, August 18, 2022. (Getty/Mandel Ngan/ AFP)

The United States—much like the rest of the world—is currently experiencing high inflation, due to a range of factors including COVID-19-related supply disruptions and Russia’s war in Ukraine. As low- and middle-income households struggle with recent inflation on top of the decadeslong affordability crisis fueled by stagnant and low wages, policies to strengthen supply and shore up households’ financial stability should take precedence over a strategy that proposes sacrificing employment to lower inflation.

Historically, countering inflation has been left to the remit of the interest rate policy of the Federal Reserve. In recent months, the Federal Reserve has been sharply increasing interest rates in an attempt to reduce demand, slow the economy, increase unemployment, and lower inflation. This risks sending the country into a recession. While low-income households often feel inflation the hardest, a Federal Reserve-induced recession would be far worse, as millions of the most economically vulnerable Americans could lose their incomes entirely.

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Alternative methods exist to fight inflation and reduce the costs of essentials over the longer term that would not adversely affect low- and middle-income households. Congress and the Biden administration have pursued some of these alternatives, including through the newly passed Inflation Reduction Act. These measures reduce inflationary pressures by investing in domestic production, boosting the United States’ productive capacity, tackling long-standing issues of corporate concentration, and more. These efforts have been underway for some time now and have already helped ease inflationary pressures. They should also help the economy better absorb some future demand and supply shocks so that it is more robust overall.

At the same time, corporations also have a role to play. While some workers are finally seeing some better wage growth thanks to tight labor markets, this wage growth is far less responsible for current inflation than corporations, many of which are pulling in record profits. Companies must shift their focus from increasing prices beyond what is necessary and performing stock buybacks at historic levels to reinvesting profits into efforts that would increase the economy’s resiliency and, collectively, minimize overall inflation. They can do this by shoring up supply chains and improving job quality. Those at the top of the income distribution should bear more of the burden of mitigating inflation, rather than repeating the same tired playbook of forcing already struggling low- and middle-income people to suffer more.

There remains little to no evidence that workers’ wages are causing today’s high inflation.

Workers’ wages are not causing inflation

Amid past periods of high inflation, economists have worried about a wage-price spiral: the idea that as workers seek higher wages to deal with inflation, employers pass these higher wages on to consumers in the form of higher prices, forcing workers to demand further higher wages, which creates a vicious cycle. However, there remains little to no evidence that workers’ wages are causing today’s high inflation. Looking at recent price and wage increases by industry makes it clear that there is no correlation between the acceleration in price inflation in any particular industry and the acceleration of wage growth in that industry. (see Figure 1)

Figure 1

At the same time, wage growth for many workers has been trailing behind inflation in 2022—although some of the lowest-wage workers have seen real wage growth. But this comes as real wages have been stagnant for decades for all but the highest-earning households. From 1979 to 2019, inflation-adjusted wages for the bottom 10 percent of households rose by just 6.5 percent; the median household saw growth of just 8.8 percent over those 40 years, while the 90th percentile of earners saw a whopping 41.3 percent growth.

Meanwhile, data from the AFL-CIO show that profits of S&P 500 companies rose by 17.6 percent in 2021—and the earnings of their CEOs grew by 18.2 percent. That’s more than twice as fast as inflation that year and almost four times as fast as nominal wage growth for regular workers. There is no evidence that typical worker wages are eating into profits either, as profit margins reached 15.5 percent in the second quarter of 2022 for nonfinancial companies, the highest they have been since 1950. (see Figure 2)

Figure 2

Profit margins reached 15.5 percent in the second quarter of 2022 for nonfinancial companies, the highest they have been since 1950.

Companies could be using their profits to expand their productive capacity for the future and ease the supply constraints that have contributed significantly to inflation. They could also be using their profits to reinvest in their workforces by paying workers better. As Walmart and many other brands have recently discovered, even slightly higher wages result in lower worker turnover and higher productivity, which ultimately boost overall economic growth. Instead, however, many corporate executives have chosen to enrich themselves.

Some business executives have admitted on shareholder calls and in surveys that they have been taking advantage of inflation to boost profits by increasing prices beyond what is needed to offset any increase in their input costs. By some CEOs’ own admission, labor expenses are not the main contributing factor to many price hikes. Meanwhile, the share of corporate income going to workers spiked briefly during the COVID-19 recession—as it tends to do in recessions, primarily because corporate income drops faster than employment—but has since fallen back down to just 58.6 percent in the second quarter of 2022, well below its average from 1947 through 2003, 63.5 percent. (see Figure 3)

Figure 3

Corporate profiteering during a disaster such as a health pandemic or an economic recession during which households are struggling is not just morally wrong, but it can also harm the economy. Company executives—rather than reinvesting much of their record profits into their workers and into the expansion of their businesses—have been executing stock buybacks at historic levels (see Figure 4), artificially boosting share prices that mainly benefit the executives themselves and other wealthy investors. In the first quarter of 2022, U.S. corporations repurchased more than $300 billion in stocks, a new all-time high.

Figure 4

Corporate executives pursue stock buybacks because most of their compensation is tied up in stock, making buybacks that quickly boost share prices extremely profitable for them, as well as for outside investors who plan to sell their shares soon after purchase and have little interest in seeing the company thrive long term. Buybacks are a form of value extraction by the wealthiest members of society, in contrast to the value creation of reinvesting profits in workers, research and development, and other forms of increasing productive capacity.

In the first quarter of 2022, U.S. corporations repurchased more than $300 billion in stocks, a new all-time high.

Workers shouldn’t lose employment or wages to bring down inflation

While CEO pay and corporate profits boom, the Federal Reserve is taking action to bring down inflation by raising interest rates, which disproportionately affects workers. For the first time in modern history, the Federal Reserve increased interest rates by 75 basis points in each of its two most recent meetings.

Although higher interest rates can help bring down inflation, they do so by slowing spending. In sectors that are already suffering from supply shortages, such as the housing sector, higher interest rates may lower supply further; in housing, they make building homes more expensive. Higher interest rates will also make large consumer purchases that require loans such as houses and cars more expensive—and potentially put them out of reach for low- and middle-income consumers. The explicit goal of raising interest rates is to decrease spending by increasing unemployment, so if interest rates are hiked too quickly or set too high, they may cause mass unemployment or even a recession.

Recently, some economists have claimed that the unemployment rate needs to rise to as high as 10 percent for one year to bring down inflation. History and persistent trends, though, show that this scenario would make unemployment rates much higher for Black and Hispanic workers, as well as for workers with a disability. This type of mass unemployment has devastating long-term effects on individuals, communities, and the economy. And it would come at a time when the United States economy is breaking records and finally experiencing a far more equitable recovery following the COVID-19 economic downturn than it did during other downturns. In July 2022, for example, the Hispanic or Latino unemployment rate reached an all-time low. A strong labor market—as the United States currently has—is critical to reducing long-term disparities.

Wages and employment do not—and should not—have to decline to bring down inflation.

That’s why it is promising that fiscal policy under the Biden administration is playing an active role in helping fight inflation by taxing the wealthy and investing in supply-side initiatives aimed at boosting productive capacity. For example, the recently passed Inflation Reduction Act seeks to address the problem of inflation in a new way through better enforcing taxes, investing in domestic clean energy, pushing down the cost of key expenses such as prescription drugs, and reducing the deficit. Measures to crack down on tax cheats can help decrease demand and reduce inflationary pressures. At the same time, a new 1 percent tax on stock buybacks could incentivize corporations to invest more in workers and productivity-enhancing ventures.

The Inflation Reduction Act also includes historic investments in clean energy, which will stimulate domestic production, help relieve supply chain bottlenecks, and directly work to lower consumer prices. It supplements the recently passed CHIPS and Science Act, which also makes supply-side investments in domestic manufacturing and research and development in an effort to keep key input and consumer costs low. Taken together, these actions enhance domestic production and take pressure off the Federal Reserve to engage in rapid interest rate hikes, while safeguarding employment and workers’ wages.


While economists traditionally worry about a wage-price spiral, there remains no evidence that wages are causing increases in inflation. Workers need pay raises after decades of stagnation, and simply put, wages and employment do not—and should not—have to decline to bring down inflation.

The nature of the U.S. economic system is such that any negative change in the economy is almost always going to hurt low-income people the most. Yet most of the people who say inflation needs to be addressed because it is hurting poor households only propose to address it by enacting policies that would disproportionately hurt those same poor households. The solution instead should be to continue using fiscal policy to focus support to struggling households, improve the economy’s productive capacity, create more resilient supply chains, and limit the profiteering of those at the top at the expense of everyone else. Corporations must invest more in their long-term sustainability through improved supply chain capabilities and conditions for workers rather than short-term profiteering.

America must not choose the continued enrichment of a few over the well-being and economic advancement of the vast majority of workers and their families.

The authors would like to thank Christian E. Weller, Seth Hanlon, David Madland, Arohi Pathak, and Lily Roberts for their helpful feedback; Suzanne Harms for her assistance with research; and Kyle Ross and Emily DiMatteo for fact-checking.

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Justin Schweitzer

Former Policy Analyst

Rose Khattar

Former Director of Economic Analysis, Inclusive Economy


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