Recently, we wrote about the impact of rising prices during the pandemic on Californians at the lower end of the income spectrum. In this post, we explore the net impact of rising prices, rising wages, and government interventions that have boosted family income.
Since December 2020, wages in California have increased 5%, amid the Great Resignation, shifts in workforce needs, and other forces in the labor market. When we account for inflation, however, average wages have actually decreased 2% over that period. If we factor in wage growth over the past two years, workers may nonetheless be slightly ahead: since December 2019, wages are up roughly 12%, or 3% when adjusted for inflation.
In 2021, inflation ate away at wage increases across major sectors of the workforce, from manufacturing to education and health services (both down 1%) to trade, transportation and utilities (down 6%). The only sector in which wage gains outpaced inflation was leisure and hospitality (up 3%). In most sectors, however, real wages are higher than they were in 2019; while construction and manufacturing wages are 1% lower when we adjust for inflation, there have been modest increases across all other major sectors.
As our previous post showed, rising prices are harder to absorb at the lower end of the pay scale. Lower-income families spend a higher share of their income to make ends meet; in particular, price increases for necessities like food and energy mean that lower-income households effectively face larger price increases as a share of their overall budget. For example, while the 3% real increase in wages in leisure and hospitality is notable, workers in this sector are much more likely to be living in poverty: in 2019, 39% of leisure and hospitality workers were below or near the poverty line, compared to 20% of workers in educational and health services and 22% of manufacturing workers (based on 2019 California Poverty Measure data).
To get a fuller picture of how low-income families are coping with rising prices, we need to factor in direct government aid during the pandemic. Here we examine two programs implemented in 2021: the expanded federal Child Tax Credit (CTC), which benefited eligible tax filers with children, including filers with little to no earned income, phasing out for those earning over $75,000; and California’s Golden State Stimulus (GSS), which granted up to two payments ($500-$1,200) to tax filers earning $75,000 or less, including undocumented immigrant families with children who filed taxes.
Our estimates simulate the additional CTC and GSS based on 2019 data, the most recent. Though they do not cover either the overall economic impact of COVID-19 or the complete set of stimulus payments and safety net expansions during the pandemic, these simulations can help us understand where benefits accrue across the income spectrum.
We estimate that the increased CTC payments and the GSS together raised annual income 19% (or $755) on average for low-income Californians (the bottom quintile). This estimate is averaged across all low-income families, but not all are eligible for these programs; for those who are eligible, the CTC boosted income by $2,200 and GSS increased incomes by $800, on average.
Given that the low-income group’s average annual cash income (prior to safety net benefits) is in the range of $13,000, CTC and GSS payments added meaningfully to resources. However, based on typical spending patterns, we estimate that the lowest-income Californians needed to add $3,000 to their annual incomes to balance out increased prices from 2019 to 2021. That is to say, only low income families who received both CTC and GSS could fully balance out rising prices.
Some middle-income families also benefited from CTC and/or GSS, but these additional payments boosted total resources only by 2–3% on average (or $1,300–1,400).
In short, rising wages and especially direct government aid in 2020 and 2021 helped low-income Californians deal with the brisk pace of inflation this past year. If, as forecasters expect, inflation continues to slow as the Federal Reserve takes action and global supply constraints ease, this could mean low income families are better off than they were before the pandemic. However, these gains could be wiped out if wage growth stalls, or government spending slows out of concern for high inflation, which could constrain economic growth.
In this uncertain macroeconomic environment, policymakers should pay careful attention to household poverty and earnings. Targeted policies such as California’s GSS and the expanded federal CTC may provide short-term relief if price pressures do not ease quickly or if the job recovery slows. In the long term, an economic engine that generates strong wage growth and policies that support broad access to those jobs—perhaps in combination with targeted safety net supports—are key for promoting equitable opportunities.