Real wage growth is happening in America—just not for the people who usually benefit from economic expansions. New data from the Cleveland Federal Reserve shows that workers in the bottom half of the wage distribution are experiencing meaningful real wage gains for the first time in a generation, while higher earners see their purchasing power stagnate.
It's wage compression in action, and it's driven by labor market dynamics that haven't been this tight at the bottom end since the late 1990s.
The Cleveland Fed analysis, which tracks hourly wage growth across income percentiles and adjusts for inflation, found that workers at the 25th percentile saw real wage growth of 2.8% over the past year. Workers at the 10th percentile—the lowest earners tracked—posted even stronger gains of 3.4%. Meanwhile, workers at the 75th percentile saw real wages rise just 0.9%, and those at the 90th percentile were essentially flat.
This is historically unusual. In most expansions, high-skilled workers capture the majority of real wage gains while low-wage workers see modest nominal increases that barely keep pace with inflation. This time, that pattern has inverted.
What's driving it? Labor market tightness at the bottom. With unemployment at 4.1% and labor force participation recovering post-pandemic, employers competing for service workers, warehouse staff, and retail employees have been forced to raise wages significantly. Companies like Walmart, Target, and Amazon now advertise starting wages of $17-20 per hour in many markets—double what they paid a decade ago.
Add in minimum wage increases in 23 states over the past two years, and you have sustained upward pressure on the bottom half of the wage distribution. Workers who could barely afford rent three years ago are now, in many cases, seeing real income gains that allow them to save or reduce debt.
For businesses, this is the other side of the equation. Labor-intensive industries—restaurants, retail, hospitality—are experiencing margin compression as wage costs rise faster than prices. A fast-casual restaurant that could staff a shift for $300 five years ago now pays $450 for the same headcount. That's a 50% increase in a cost category that typically represents 30% of revenue.
The political implications are significant. Wage growth for lower earners has been a stated policy goal for both parties, but it tends to happen during tight labor markets, not through legislation. When workers have options—when they can quit a $14/hour job and immediately find a $17/hour job down the street—employers have to compete on wages.
The data also explains some of the disconnect between economic statistics and consumer sentiment. High earners, who dominate media and political discourse, aren't seeing real wage gains. But lower earners, who felt the pain of inflation most acutely in 2021-2023, are now seeing their purchasing power recover and then some.
For investors, the wage compression trend has clear implications for profitability in labor-intensive sectors. Companies with low margins and high labor costs—think fast food, hospitality, long-term care—face structural pressure on earnings unless they can pass costs through to consumers or offset them with automation.
That's already happening. McDonald's is accelerating deployment of kiosks and mobile ordering. Walmart is testing stores with minimal checkout staff. Hotels are moving to app-based check-in. Each of these moves is a direct response to wage pressure at the bottom of the distribution.
The Cleveland Fed data captures a moment in time—Q4 2025 through Q1 2026—and labor markets are dynamic. But the trend is notable: for the first time in decades, the workers who earn the least are gaining ground in real terms. Whether that continues depends on whether labor markets stay tight, and whether automation accelerates fast enough to reverse the gains. The numbers don't lie: right now, the bottom half is winning.
