Prices Aren’t Falling. Can Incomes Keep Up?

Series: The New Price Reality

My last article argued that prices aren’t going back to where they were. Not for groceries, not for gas, not for most of what we buy every day. People are really hurting and struggling to make ends meet.

This reality raises a more important question: If prices aren’t falling, how do people get ahead?

In theory, the answer to that question is simple — incomes must rise. But in, practice, this is where things get a bit more complicated.

It’s easy to say wages should go up. It’s much more difficult to make that happen.

Unlike prices, which can rise quickly during periods of inflation, incomes tend to move more slowly. Income is tied to hiring decisions, business conditions, productivity, and negotiation power.

The politician’s mantra is “put more money in the American people’s pockets” or “we’re going to raise wages”. But there’s no switch to flip to increase wages across the board for people.

What elected officials can do is influence the conditions that make higher incomes possible. But those conditions take time to develop—and they come with tradeoffs.

When Workers Have Leverage, Wages Rise

The most reliable driver of wage growth is simple: leverage.

When employers need workers more than workers need employers, pay goes up. We saw this play out in the years following the COVID pandemic, when labor shortages pushed wages higher in many industries, especially in lower-paying job sectors.

But maintaining that kind of environment is difficult. A labor market that is too tight can fuel inflation. One that is too weak puts downward pressure on wages. Policymakers are constantly trying to balance between those two outcomes—and they don’t always get it right.

Government has tools at its disposal, but they affect wages indirectly; they are not precise:

· Stimulus and public spending can boost demand for labor

· Immigration policy affects the size of the workforce

· Interest rates influences business hiring activities

The Role of Productivity

There’s a deeper force behind income growth that gets less attention: productivity.

Over time, wages rise when workers produce more value per hour. Better tools, systems, and technology are what allow businesses to pay more without raising the prices of their goods and services. If workers can generate more value per hour, then higher wages become sustainable.

This is the slow path, but it’s the durable one.

Governments can support increases in productivity through:

• Investments in infrastructure

• Funding research and development

• Incentivizing business investment

• Education and workforce training

But this is the long game, not an immediate fix. Productivity gains take years to show up in your paycheck, and this is why quick promises are the politician’s go to.

Policy Can Help—But Only at the Margins

There are ways government can push incomes higher more directly.

Minimum wage increases, labor protections, and tax credits can boost take-home income, especially for lower-wage workers. Programs like the Earned Income Tax Credit effectively raise income without requiring employers to pay more.

But these tools have limits.

Raise wages too aggressively, and businesses may hire less or raise prices further. Expand tax credits, and the cost shifts elsewhere in the system.

One other strategy is policies aimed at strengthening industries like manufacturing, energy, and technology that can help create more high-paying jobs. We’ve seen this recently in efforts to bring back semiconductor production to the U.S. The idea is straightforward: if there are more higher paying job sectors, average incomes will rise. The problem is, these things take time, and not everyone benefits equally.

None of these policies are silver bullets. They help—but they don’t fundamentally change how income growth works.

Another Way to Think About It

There’s a different way to approach the problem; an angle that often gets overlooked.

If incomes are slow to rise, then improving living standards can also come from reducing major costs—especially the ones that dominate household budgets.

Here’s where government can implement policy reforms that can matter a lot, like:

· Zoning reform to increase the housing supply

· Healthcare cost reforms

· Childcare subsidies and support

Housing, healthcare, and childcare matter more than marginal changes in everyday prices. Lowering those costs can effectively increase real income, even if wages themselves don’t move much.

This may be the most realistic path to improving the standard of living in the short term

But, even when incomes do rise, they rarely rise fast enough to keep up with sudden increases in prices.

That gap is what people feel.

Prices jump quickly. Paychecks adjust slowly. And in between, households are forced to stretch, cut back, and rethink how they spend.

By the time wages begin to catch up, the damage—financial and psychological—has already been done.

The Reality

Instead of promising cheaper prices or magically higher wages, politicians could have a franker conversation with their constituents, and it would sound something like this:

· We are now in a higher cost economy

· Raising incomes will take time

· We have policies that can help, but none are quick fixes

· I will work to get reforms passed that will increase your real income

This may not be quippy or catchy, or the most inspiring campaign message, but it’s closer to reality.

Prices aren’t going back.
Incomes can rise—but not overnight.

And until they do, the pressure people feel at the grocery store, at the gas pump, and in their monthly bills isn’t going anywhere.