The K-Shape
Gap between lower-income wage growth and inflation
Historically follows Energy CPI (All Items) by 1 quarter — no active signal. Energy CPI (All Items) · View projections
What is the current The K-Shape?
Lower-income households saw after-tax wage growth of just 1.1% year-over-year in late 2025, while CPI inflation ran at approximately 3% — creating a negative 2 percentage point real wage gap, according to Bank of America Institute data. Higher-income workers saw 4% wage growth, comfortably ahead of inflation. The K-shape divergence has been a persistent feature of post-2020 wage data. Source: Bank of America Institute (2025).
The gap between what higher-income and lower-income workers earn has widened to levels not seen since 2016, and the lower end is falling behind prices.
The Atlanta Fed Wage Growth Tracker for the bottom income quartile, minus the headline CPI inflation rate, sits at 1.1 points in 2025. That is the gap between what lower-income workers' wages are growing at and what prices are growing at. Higher-income wage growth has comfortably outpaced inflation through the same period. The gap between the two groups widened sharply in 2022 and has remained wide since.
This divergence is the mechanism behind what shows up in other indicators as household distress. The Squeeze tracks the share of U.S. households spending nearly all of their income on necessities, and that share has stepped up year over year since 2023. When wages at the bottom of the distribution grow more slowly than essential costs, the shortfall does not appear as a recession. It appears as slowly deepening pressure on lower-income households.
The economic recovery from 2020 onward was initially described as K-shaped — a temporary phenomenon expected to resolve as the labor market tightened. Five years later, the K has become structural. Pink Slips announcements have stepped back up, disproportionately affecting lower-wage workers in government and support functions. And The Warning Light — running below the Conference Board's recession threshold — suggests the pressure is more likely to deepen than ease.
Explore Further
Is this happening to you?
Has your raise kept up with what you're actually paying for rent, food, and insurance?
How has The K-Shape changed over time?
Most affected counties
Counties with the highest labor scores in the County Distress Index.
Explore all 3,144 counties →| Period | Value | YoY Change |
|---|---|---|
| 2025 | 1.1 pts | −1.1 pts |
| 2024 | 2.2 pts | −0.2 pts |
| 2023 | 2.4 pts | +3.4 pts |
| 2022 | -1 pts | −1.0 pts |
| 2021 | 0 pts | −3.2 pts |
| 2020 | 3.2 pts | +0.5 pts |
| 2019 | 2.7 pts | +1.1 pts |
| 2018 | 1.6 pts | −0.3 pts |
| 2017 | 1.9 pts | −0.6 pts |
| 2016 | 2.5 pts | −0.6 pts |
| 2015 | 3.1 pts | +2.6 pts |
| 2014 | 0.5 pts | +0.5 pts |
Frequently Asked Questions
Are wages keeping up with inflation for lower-income workers?
No. Lower-income households saw wage growth of just 1.1% year-over-year in late 2025 while CPI inflation ran at approximately 3%, resulting in a real wage decline of about 2 percentage points. Their purchasing power is shrinking.
Is the wage-inflation gap the same across income levels?
No. Higher-income workers saw 4% wage growth, comfortably ahead of 3% inflation, while lower-income workers experienced a negative real wage gap. This K-shaped divergence means economic averages mask worsening conditions for the bottom half of the income distribution.
How long has the K-shaped recovery lasted?
The K-shaped pattern was initially described as a temporary post-pandemic phenomenon expected to resolve as the labor market tightened. Five years later, the divergence has become structural, with the gap widening to multi-year highs.
How does the wage gap affect household financial distress?
When wages grow at 1.1% and essential costs grow at 3%, the shortfall directly drives the squeeze visible in other indicators: 29% of lower-income households spend 95%+ of income on necessities, the savings rate has fallen to 3.6%, and 37% of adults cannot cover a $400 emergency.
Where does the wage-inflation gap data come from?
Bank of America Institute analyzes aggregated internal depositor data to track wage growth by income quartile. The American Distress Index combines this with BLS CPI data and the Atlanta Fed Wage Growth Tracker to compute the real wage gap for lower-income households.
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