Nicholas Weiss
Low income wage growth hit 4.1% year over year in June, the fastest pace since July 2023, according to transaction data from Bank of America Institute. That figure now nearly matches the 4.2% after tax pay growth seen among higher income households and has moved well past the 3.4% posted by middle income earners, marking a notable shift in who is capturing the gains from a still resilient labor market.
What the Numbers Actually Show
The headline detail isn't just that lower income after tax pay accelerated. It's that higher income wage growth actually slowed over the same period, according to the Bank of America report. That combination, one cohort speeding up while another cools, has erased what had been a persistent gap favoring higher earners for much of the past several years.
David Tinsley, senior economist at Bank of America Institute and a co author of the report, framed it as a rebalancing. He noted that faster pay growth among lower income workers points to purchasing power spreading more evenly across the household income spectrum again, rather than concentrating at the top.
Job Switching Economics Behind the Shift
Two mechanical drivers explain most of the convergence, per the Institute's analysis. The first is job switching. Employees who change employers typically capture a larger pay bump than those who stay put, and switching activity picked up in the three months through June compared with the same window last year.
The pay premium for switching is now tilted toward lower earners specifically. Bank of America's economists found that lower income households moving jobs saw pay increases averaging around 12%, versus roughly 9% for higher income households making the same kind of move. That gap, on its own, does a lot of work in explaining the wage growth reversal.
The Tax Policy Wrinkle
The second driver is fiscal rather than labor market driven. Some lower and middle income households have adjusted their tax withholding this year in response to changes under the One Big Beautiful Bill Act, the tax and spending legislation President Donald Trump signed last year. Lower withholding mechanically raises take home pay growth even absent any change in gross wages, and the Institute's economists flagged this as a meaningful contributor to the after tax figures.
This matters for anyone trying to separate durable wage gains from one time paycheck effects. A worker's W2 gross pay may be rising at a steady clip while their after tax take home figure jumps for reasons tied entirely to withholding elections rather than employer generosity.
Durability of the Low Income Wage Growth Trend
Whether this reversal holds depends on two largely independent variables. On the withholding side, Bank of America's economists estimate the OBBBA related boost to take home pay growth could persist for about a year, since it reflects a level shift in withholding rather than a one off adjustment that fades within a quarter.
On the labor market side, the job switching premium is contingent on demand for workers staying firm. The economists were explicit that this component of low income wage growth would be vulnerable to a pullback if labor demand slows. In other words, the wage convergence is partly structural (tax policy) and partly cyclical (labor market tightness), and only the first piece comes with a reasonably confident shelf life.
Why Economists Are Watching Spending Power
Tinsley pointed to a consumption angle that matters beyond the wage data itself. Lower income households tend to spend a larger share of each incremental dollar earned than higher income households do, meaning marginal propensity to consume is higher at the bottom of the income distribution. If the after tax pay gains persist, even partially, they could provide a tailwind for aggregate consumer spending in coming months, according to Tinsley.
Will the Convergence Survive a Softer Labor Market
The open question is what happens if hiring cools before the OBBBA withholding effect runs its course. A slowdown in labor demand would likely compress the job switching premium first, since fewer employers competing for workers means smaller pay bumps for those changing jobs. That would leave the tax driven component carrying more of the weight, and it alone may not be enough to sustain the current pace of low income wage growth relative to other cohorts.
Alana Hill
