Low income wage growth hits fastest pace in three years

Low income wage growth hit a three year high in June, nearly matching higher earners. See what is driving it and whether the trend can last.

Low income wage growth hit its fastest pace in three years this June, according to transaction data from Bank of America Institute, a sign that the earnings gap between lower paid and higher paid workers may finally be closing.

After tax pay for lower income households climbed 4.1% from a year earlier, the strongest reading since July 2023. That topped middle income wage growth of 3.4% and came close to matching the 4.2% gain seen among higher earners. Notably, pay growth for higher income households actually cooled off, which economists say has erased much of the advantage that group held for the past few years.

What Changed for Low Income Wage Growth

David Tinsley, senior economist at Bank of America Institute and a coauthor of the report, put it plainly: higher income households had been pulling further ahead for years, but that gap is now shrinking. He said faster pay gains for lower income workers point to spending power becoming more evenly distributed across the household income spectrum again.

Two forces appear to be doing most of the work here. The first is job switching. More workers changed employers in the three months leading up to June this year compared with the same stretch last year, and switching jobs tends to come with a real pay bump. That pattern held across income levels, but it paid off more for lower income workers, who saw roughly 12% pay increases when they moved to a new job, compared with about 9% for higher income workers making the same move.

The second factor traces back to tax policy. Some lower and middle income households have adjusted their tax withholdings this year in response to changes tied to the One Big Beautiful Bill Act, which President Donald Trump signed into law. Reducing withholding means more money shows up in each paycheck right away, even if the total tax bill later looks the same, and Bank of America economists believe this is contributing to the stronger take-home pay figures showing up in their data.

Will the Momentum Hold

Whether lower income workers stay near the top of the wage growth rankings depends on two separate things holding steady. Bank of America economists said the withholding related boost to take-home pay could last for roughly a year, since it reflects a shift in how much tax is collected upfront rather than a permanent change in earnings.

The job switching benefit is tied more directly to the health of the labor market. As long as hiring conditions stay solid and workers keep finding better paying opportunities elsewhere, that source of wage growth should persist. But the same report includes a warning: lower income wage growth is more exposed to a slowdown in labor demand than the other drivers at play. If companies pull back on hiring or job openings dry up, the incentive and opportunity to switch jobs for a raise fades quickly.

Why This Matters Beyond Paychecks

The reason economists are paying close attention to this shift goes beyond fairness. Tinsley noted that lower income households are seeing their strongest after tax pay gains in nearly three years, and that matters for the broader economy because these households tend to spend a larger portion of every extra dollar they bring home. That spending pattern means a wage boost concentrated among lower earners could do more to support consumer spending in the coming months than an equivalent gain among higher earners, who are more likely to save the extra money.

Does This Trend Have Staying Power

The honest answer is nobody knows yet. The tax withholding effect has a rough shelf life of about a year, and the job switching advantage only lasts as long as employers keep hiring. Watch upcoming jobs reports closely: if labor demand softens, lower income wage growth is the piece of this story most likely to slip first.