The mechanism: one number for almost everyone
Firms do not price each worker's raise individually. They pick a single modal annual increase and apply it during one firm-specific "on-cycle" month. The result is a tight pile of raises around the norm.
A pile of raises, not a market
Most workers get within 0.5 percentage points of the firm's modal raise; more than 90% land within 1.5 points. Pick a norm to see how raises cluster.
The norm that didn't click up
Consumer prices rose sharply from mid-2021 to late 2023, peaking at 9% in June 2022. The modal firm norm barely moved.
What it did to real paychecks
Among workers continuously employed at the same firm from December 2020 through December 2024, 43% ended with lower real wages than they started with. For those who fell behind, the mean loss was about 9% and the median about 7%. Median year-over-year real wage growth for job-stayers went from roughly +1% in 2017–2019 to about −4% during the inflation surge.
Real wages stepped down onto a lower track
Median real wages fell 4% during the inflation period and did not return to their 2020 level until late 2024. By December 2025 the real wage index sits roughly 7% below the 2017–2019 trend and about 4% below the 2000–2019 trend.
The erosion deepens over time
The 43 who lost, the 57 who did not
The two escape hatches — and why both leaked
Workers could escape a sticky norm by changing employers or by earning a large off-cycle raise. But both hatches reached a minority; the within-firm distribution grew a fatter right tail while the middle stayed anchored.
Job changers kept up with inflation
Job changers' nominal wage growth tracked inflation nearly one-for-one. But switching is infrequent.
Off-cycle raises were bigger, but rare
On-cycle raises cluster between 2 and 4%. Off-cycle raises were larger and right-skewed: two-thirds exceeded 4% and one-third exceeded 8%.
Who got hurt, and where the money went
The damage was not even across workers — and the money that did not go to wages showed up elsewhere in the economy.
Older workers took the biggest hit
About 55% of workers aged 50 and older saw a cumulative real wage decline. Older workers switch employers less often, gain less when they do, are less likely to receive a large within-firm raise, and already had flatter age-earnings profiles.
Profits absorbed the gap
The U.S. corporate profit share of GDP rose 1.7 percentage points between the pre-pandemic and inflation periods, to its highest sustained level in half a century.
What if firms had indexed raises to inflation?
Indexing modal raises one-for-one to inflation, holding all else fixed, closes about 40% of the aggregate gap relative to the 2017–2019 trend and about 73% relative to the 2000–2019 trend. Extending indexation to all job-stayer wage growth closes more than half of the former and essentially eliminates the latter.
Two costs worth separating
- Deadweight loss: the effort workers spent searching, switching, and negotiating to defend a real wage.
- Transfer: the real wage decline absorbed by everyone who did not act, moving from workers to firms.
Lower-wage workers were briefly protected
Workers in the bottom two deciles had higher job-switching rates. Their real wage growth stayed positive in 2021 while every other decile fell about 2%. Over the full 2021–2024 window the pattern looked much like the pre-period.
Why it still stings years after inflation went away
Sentiment recovered where real income was protected, not simply where inflation stopped.
The natural experiment: Belgium versus its peers
Belgian wages are automatically indexed to inflation. Belgium absorbed the same inflation, the same labor market, and the same shocks as Germany, the Netherlands, Denmark, and the broader Eurozone. Yet Belgian real wages rebounded to pre-inflation levels by 2023 and consumer confidence recovered with them, while peer countries had not recovered by the end of 2024.
Consumer sentiment tanked and stayed low
U.S. consumer sentiment fell to 56.1 in Q3 2022, below its Great Recession trough of 57.4. In early 2024, more than 40% of Americans still named inflation and cost of living as their family's biggest financial problem — against an 8% average from 2000 to 2021.
Retired households were protected
Inside the U.S., retired households, whose income is largely indexed through Social Security and asset income, saw far smaller sentiment declines than working-age groups exposed to sticky norms.
The puzzle this paper solves
Americans stayed furious about prices long after inflation subsided, with unemployment at historic lows, because the real wage level they lost never came back. The same pattern appears wherever income is indexed — and disappears wherever it is not.
Source: Becker Friedman Institute Working Paper No. 2026-108, "Sticky Wage Norms and the Real Wage Cost of Unexpected Inflation" by Hurst, Patterson, Richardson, and Wang (August 2026).