How lower-paid workers are getting their biggest pay raise in years

Although overall pay growth for U.S. workers has slowed, in July one group saw their fastest wage growth in more than three years — by jumping ship and changing jobs, according to the Bank of America Institute. 

Job switchers receiving larger pay hikes were mostly lower-paid, hourly workers, the research firm said in a recent report. In July, the three-month moving average wage increase for job changers hit a three-year high of 12.5%, according to the report. 

Pay bumps for switching jobs remain below pandemic levels, the firm notes. Still, economists say they're encouraged by the acceleration in wage growth among lower-paid workers.

"The fact that we're seeing these workers see a strong jump in pay associated with job changing suggests there's a pickup in pay for lower-income workers, and there's increased mobility among those who are paid hourly," Bank of America Institute economist Taylor Bowley told CBS News. "We are seeing a narrowing in what used to be a strong pay differential between lower-income and higher-income workers."

In August, lower-income households' after-tax wages rose 4.7% year over year, while higher-income households' pay rose 3.5%. 

Faster wage growth doesn't mean flourishing

Lower-paid workers tend to be concentrated in leisure and hospitality, transportation and warehousing, and in some parts of the retail sector. 

Nearly 25% of U.S. workers are "functionally unemployed," meaning they are unemployed and looking for a job, working part-time involuntarily, or earning poverty-level wages (less than $26,000 annually before taxes), according to the nonpartisan Ludwig Institute for Shared Economic Prosperity.

Meanwhile, the federal minimum wage remains $7.25 an hour, the same level as in 2009, while high inflation since the pandemic has eroded consumers' purchasing power. 

Separate BofA Institute research on the job-switching pay premium found that higher-income earners typically see greater gains when they stay with their employers, while younger or lower-paid workers typically see higher wage gains by moving to another employer. 

Gad Levanon, chief economist at The Burning Glass Institute, a provider of labor market and career insights, said job switchers often leave their employer for a better or higher-paying opportunity, so it's not surprising they earned substantially higher pay increases than non-job switchers.

"There's a bit of a selection in that the switchers could simply be better workers than the ones who aren't leaving. Therefore, when they switch, they get a higher raise," he told CBS News. 

Switching jobs also may involve taking a higher-level position at another company.

AI spurs "job hugging"

Levanon added that the quit rate among white-collar workers in industries like finance, insurance, real estate, technology and consulting tends to be lower than for hourly workers, largely because job growth in such industries is weak. 

This is "partly because AI is automating many of these jobs," he said.

Many such workers are clinging to their jobs, a practice known as "job-hugging," as their careers appear most exposed to AI-driven changes in hiring, according to ADP Research.

"So there's kind of a glut of people who want to work in those industries, and people aren't getting a lot of outside offers. They have a lot of competition, so they stay put," Levanon said.

Bowley said employers are facing what she called a skills mismatch as they report struggling to recruit workers with the precise qualifications and abilities that they seek. 

"That gives people who are looking for a job more bargaining power, and incentivizes businesses to pay more for the type of workers they're looking for for that role," she said. 

Indeed, the AI data center buildout also could be contributing to the higher pay hikes for some job switchers, Bowley said. The high-tech centers powering rising AI usage require construction workers, electricians and HVAC specialists, for example. Such roles command a wage premium compared to traditional commercial or residential construction, research from Revelio Labs shows. 

Edited by Alain Sherter