Inflation Stopped Rising So Quickly. The Pay Cut Never Came Back.

A new University of Chicago working paper gives a remarkably good explanation for why people can be told inflation is under control while still feeling substantially poorer.

The researchers analyzed ADP payroll records covering roughly 16 million U.S. workers per month from 2016 through 2025.

Their central finding is painfully simple:

Companies kept giving raises designed for a 2% inflation world while prices were rising 7%, 8% and 9%.

Before the pandemic, the typical firm's annual raise was around 3%. When inflation surged, companies barely changed that norm. Even at the peak, most workers remained at firms where the standard raise was only 2% to 4%.

The chart on page 25 makes this almost comically obvious. Inflation shoots toward 7% while the typical company raise inches from roughly 3% to 3.5%.

Workers absorbed the difference.

Among people who remained with the same employer from 2020 through 2024, 43% ended the period earning less in real terms than when they started. Among those who lost purchasing power, the average decline was almost 9%.

Including people who changed jobs only improves the number to 37%.

The paper estimates that roughly one in five American workers ended 2024 with real wages more than 9% below their 2020 level.

That helps explain something I think gets missed whenever we talk about inflation.

Lower inflation does not mean prices went back down.

And getting another ordinary 3% raise after inflation returns to normal does not restore the purchasing power you lost while prices were rising much faster than your paycheck.

The loss becomes permanent unless somebody eventually gives you a large enough raise to catch up.

Changing jobs worked

One of the most striking findings is what happened to people who switched employers.

For job-stayers, only about 27% of inflation flowed through into wage growth.

For job-changers, it was 96%.

In other words, changing companies caused wages to adjust almost one-for-one with inflation while staying with the same company generally did not.

That puts some economics behind the familiar experience of discovering that the best way to get a meaningful raise is to leave.

Workers who stayed could sometimes escape the normal raise through promotions or off-cycle adjustments. Those increased sharply in 2021 and 2022. But that meant negotiating, getting another offer, threatening to leave or otherwise forcing the issue.

The authors make an important point about this too:

Even workers who successfully kept up with inflation often had to spend time and effort defending their purchasing power.

Older workers got hammered

The age breakdown is especially ugly.

Among workers 50 and older, 55% experienced a real wage decline between 2020 and 2024.

They changed jobs less often, received less benefit when they did change jobs and were less likely to receive large internal raises.

Younger workers had more ways to escape the standard company raise.

Older workers were much more likely to simply absorb the loss.

And where did some of that money go?

This may be the most provocative part of the paper.

The authors argue that when companies allow inflation to reduce an employee's real wage, the missing purchasing power does not simply disappear. Lower real labor costs benefit the employer.

Corporate profits as a share of GDP increased from an average 11.4% before the pandemic to 13.1% during 2021–2025, the highest sustained level in roughly half a century.

The authors are careful here. They do not claim sticky wages caused the entire increase in corporate profits. They call it a consistency check rather than a causal decomposition.

But the magnitude is remarkably close to what their estimated real-wage losses would predict.

That makes the distributional story difficult to ignore.

Workers received raises.

Companies could truthfully say they were increasing wages.

But because those raises were smaller than inflation, a significant portion of workers effectively received a multi-year pay cut while corporate profitability increased.

Belgium provides an interesting comparison

Belgium automatically indexes wages to inflation.

It experienced a similar inflation shock to nearby European countries. Real wages initially fell there too because indexing operates with a lag.

Then something different happened.

Belgian wages caught back up.

By mid-2023, real wages had returned to their pre-inflation level and consumer confidence recovered alongside them. In Germany, Denmark and the Netherlands, wages remained depressed and consumer confidence remained substantially below its previous level.

That supports the paper's larger argument:

People were not merely angry that prices went up. They actually lost purchasing power.

And many never got it back.

That distinction matters because inflation is usually discussed as though the problem ends once the inflation rate comes down.

For millions of workers, it didn't.

Their employer quietly reset their standard of living downward by continuing to hand out the same 3% raise it had always handed out.

Inflation eventually ended.

The pay cut remained.

Read Sticky Wage Norms and the Real Wage Cost of Unexpected Inflation.

This is an August 2026 working paper by Erik Hurst, Christina Patterson, Nela Richardson and Ye Liv Wang. It has not yet gone through the full journal publication process.