America’s Cost-of-Living Crisis Is a Wage Problem, Not a Price Problem

KEY POINTS

The current cost-of-living crisis – defined by the soaring cost of essential services – is not the result of excessive consumer demand or short-term inflation shocks. It is the product of decades of trade and industrial policy choices that weakened middle-class wage growth.
Although China’s accession to the World Trade Organization (WTO) accelerated global manufacturing productivity and lowered the price of tradable goods, it simply masked wage stagnation in the United States with cheap goods. It also hollowed out U.S. manufacturing and severed the link between productivity growth and broad-based wage gains.
The resulting wage polarization has left the middle and working class unable to keep pace with rising costs in labor-intensive service sectors such as housing, healthcare, education, and childcare.
A renewed industrial policy – supported by targeted tariffs – can help rebuild productivity-linked wages in tradable sectors, restoring the wage base necessary to make essential services affordable again.

The Crisis of Affordability

America is in the throes of a cost-of-living crisis characterized by the high cost of essential services (Figure 1). This is largely the product of trade and industrial policy choices that have produced a sharp divergence between wage growth in high-productivity service sectors and stagnation in manufacturing and other middle-income occupations.

FIGURE 1:

The affordability crisis is really a wage crisis. While the average paycheck has exceeded the price of cheap tradable goods (e.g. TVs, clothes), it has failed to keep pace with the exploding cost of essential services (e.g. housing, childcare, medical services). Recent surveys show that nearly three-quarters of American workers cannot afford anything beyond basic living expenses, with housing, health insurance, and everyday essentials cited as the primary sources of financial stress [1].

Crucially, this strain is no longer confined to low-wage workers; it extends across professional and middle-income occupations. Nearly 30% of workers have relocated to lower-cost housing and 28% have taken on debt to finance daily expenses [2]. These symptoms are not the result of individual choices or temporary inflation spikes – they reflect a structural failure in how the U.S. economy generates and distributes income.

Understanding why this wage crisis emerged requires looking beyond inflation and toward the long-term restructuring of the U.S. economy – particularly the collapse of manufacturing as a middle-wage anchor and the concentration of wage growth in a narrow set of high-productivity service sectors.

The China Shock

The roots of today’s cost-of-living crisis can be traced back to 2001, when the United States backed China’s entry into the World Trade Organization. U.S. corporations, enticed by China’s low labor costs, extensive state subsidies, preferential financing, and weak labor and environmental standards, rapidly outsourced production to the country [3]. This transfer of capital, investment, and industrial know-how accelerated China’s manufacturing productivity well beyond that of the United States (Figure 2).

FIGURE 2:

This shift produced real and tangible benefits. As the United States increasingly relied on China’s subsidized industrial base to lower consumer prices, the cost of tradable goods fell sharply. Merchandise imports from China rose by roughly $149 billion – an increase of about 138% – since 2000, according to Census Bureau data. Lower prices for consumer goods boosted purchasing power for U.S. households and helped keep headline inflation in check for years. In narrow economic terms, consumers gained at the register.

But these gains came with profound and uneven costs. In exchange for cheaper goods, the United States allowed its domestic manufacturing sector to erode. The “China Shock” was not a gradual adjustment but a rapid and concentrated disruption. China’s scale, speed, and state-directed industrial expansion overwhelmed U.S. manufacturing communities that had little time or capacity to adapt. An estimated 3.4 million factory jobs disappeared, particularly in the Midwest and Southeast, and many were never replaced [4].

New research tracking individual workers over nearly two decades shows that while some manufacturing towns eventually recovered in aggregate economic terms, the workers who were displaced did not. As a result, manufacturing ceased to function as a wage anchor even in communities that appeared to recover [5].

Instead, local recoveries were driven by growth in healthcare, education, retail, and food services – sectors that offered lower pay, weaker career ladders, and little connection to the skills and experience of former factory workers. Many displaced workers remained in their communities, but they experienced stagnant earnings, lost promotion opportunities, and a permanent reduction in lifetime income. In effect, workers did not just lose jobs; they lost livelihoods and career paths.

The social consequences were severe and persistent. Communities exposed to the China Shock experienced higher unemployment, lower wages, increased reliance on disability and income support programs, rising rates of single parenthood and child poverty, and elevated mortality. Research indicates that import competition accounted for 55% of the total decline in U.S. manufacturing employment during this period, with 86% of those lost jobs resulting in workers leaving the labor force entirely rather than finding new work [6].

The Productivity-Pay Gap

These outcomes entrenched the disconnect between how much workers produced and how much they earned, which is referred to as the “productivity-pay gap” (Figure 3). The structural break between productivity and wages began in the late 1970s when policy choices favoring deregulation and the suppression of labor unions first severed the link between economic growth and worker compensation [7].

FIGURE 3:

The China Shock exacerbated this disparity, ensuring that the value from productivity gains went to the wealthiest Americans rather than to the working class (Figure 4).

FIGURE 4:

At the same time, U.S. corporate profits soared, growing from less than 6% of GDP in 2000 to 11% by 2024 according to the Federal Reserve. Moreover, after tax corporate profits are now $2.8 trillion higher than they were in 2000 [8]. Yet, relatively little of these record profits were reinvested (Figure 5). Instead, corporations increasingly returned earnings to shareholders through dividends and equity retirement.

FIGURE 5:

While real median wages have risen by roughly 13% since 2000, this aggregate figure masks a deeper imbalance. Much of this growth was driven by high-skill service sectors, such as technology (information services), business and professional services, and finance, while manufacturing wages lagged behind (Figure 6) [9].

FIGURE 6:

So Why are Services So Costly? The Baumol Trap

An insight first articulated in the 1960’s by economist William Baumol helps explain the soaring cost of essential services [10]. In labor-intensive sectors, wages must compete with the highest-paying opportunities elsewhere in the economy, even when productivity growth in those services is limited. Baumol’s Cost Disease explains why the prices of healthcare, education, childcare, and housing services rise over time; it does not, on its own, explain why those prices became unaffordable for the median worker [11]. That outcome depends on whether wage growth is broad-based or narrowly concentrated.

Consider essential services like healthcare, education, and childcare. These sectors are characterized by slow productivity growth – e.g. it takes roughly the same amount of time to care for a patient or teach a class today as it did decades ago. Yet wages in these sectors must rise to attract skilled professionals and retain workers who could otherwise move into higher-paying fields. In today’s economy, those outside options are increasingly defined by high-productivity service sectors such as technology, finance, and professional services. Competition for labor and for scarce urban real estate pushes up costs across the service economy, from salaries to land, even where output per worker has not meaningfully increased.

The affordability crisis emerges because this cost transmission has become one-sided: prices for essential services increasingly reflect the wage levels of the highest-earning parts of the economy, while the purchasing power of median wages relative to services has remained flat (Figure 7). As a result, more Americans are paying the prices of an economy geared toward top-end incomes with paychecks that reflect neither that productivity nor that purchasing power as noted earlier in Figure 3.

FIGURE 7:

How Tariffs and Industrial Policy Can Help Address the Cost-of-Living Crisis

The cost-of-living crisis is fundamentally a wage problem, and tariffs matter because they help restore wage growth in tradable sectors – especially manufacturing – where productivity can support rising pay. Evidence from recent trade enforcement shows this mechanism at work.

Following the imposition of Section 232 tariffs in 2018, the U.S. steel industry reversed years of contraction. Between 2017 and 2021, steel imports fell by roughly 17%, while domestic steel production rose to about 5% above pre-tariff levels [12]. Capacity utilization climbed to over 80% in 2021, the highest level in more than a decade – crossing the threshold historically associated with sustained profitability and hiring. Domestic steelmakers responded by restarting idled facilities and expanding capacity, announcing nearly $22 billion in new investment and roughly 20 million metric tons of new or restarted steelmaking capacity since 2018 [13]. These investments supported higher employment and wage growth in primary metals manufacturing, where tighter labor markets translated directly into higher compensation for production workers.

Likewise, section 301 tariffs imposed during 2018 reinforced these dynamics across a broader set of manufacturing industries. For example, tariffs on Chinese imports reduced import penetration by roughly 25-70% across heavily affected sectors such as furniture, semiconductors, and motor-vehicle parts – while increasing the value of U.S. production by up to 7–8% in several industries [14]. These output gains were accompanied by higher domestic prices and improved margins, creating the conditions for firms to expand production and compete for labor rather than downsize. Tariffs modestly raise prices for certain goods, but they strengthen the wage channel that matters far more for affordability.

The relevance to the cost-of-living crisis is straightforward. Rising wages in manufacturing do not just benefit factory workers; they rebuild the middle-wage base that allows households to absorb structurally rising service costs. When manufacturing wages rise with productivity, households are better positioned to pay for housing, healthcare, education, and childcare – costs that tariffs do not directly control but that wages must ultimately cover.

REFERENCES:

[1] Forbes. “The Wage Crisis of 2025: 73% of Workers Struggling.” January 24, 2025.

[2] Resume-Now.com. “The Wage Crisis of 2025: 73% of Workers Struggle Beyond Basic Living Expenses.” January 22, 2025.

[3] Brigham Young University. “An Evaluation of American Companies that Outsource Manufacturing to China: Decision-Making and Performance,” March 21, 2007.

[4] CPA. “Job Loss by Metro Area Shows Devastation From China Shock,” September 20, 2023

[5] WSJ. “Manufacturing Towns Hit by the ‘China Shock’ Bounced Back. The Workers Didn’t.” February 3, 2025.

[6] Autor, David, et. al. On the Persistence of the China Shock. Working Paper 29401. October 2021.

[7] Economic Policy Institute (EPI). “The Productivity-Pay Gap,” September 3, 2025.

[8] Federal Reserve Bank of St. Louis (FRED). “Corporate Profits After Tax.” December 18, 2025.

[9] FRED. “Employed Full Time: Median Usual Weekly Real Earnings: Wage and Salary Workers: 16 and Over.” December 18, 2025.

[10] FT. “Why Americans Are Feeling Poorer Even Though They’re Not.” December 6, 2025.

[11] UNESCO. “Baumol’s Cost Disease: Long-Term Economic Implications Where Machines Cannot Replace Humans.” October 27, 2025.

[12] USITC. Economic Impact of Section 232 and 301 Tariffs on U.S. Industries. March 2023.

[13] CPA. “Section 232 Steel Tariffs are Necessary for National Security.” November 4, 2025.

[14] USITC. Economic Impact of Section 232 and 301 Tariffs on U.S. Industries. March 2023.

The latest CPA news and updates, delivered every Friday.

NEWSLETTER

CPA ADVOCACY ISSUES

China’s Record Trade Surplus and Washington’s Financial Trump Card

THE LATEST

China’s Record Trade Surplus and Washington’s Financial Trump Card

House Hearing on China Investment in US Reveals Much More Needs to be Done

The China Dependence Big Pharma Doesn’t Want Washington to See

CPA Celebrates Member PAI Pharma’s Acquisition of Nivagen Pharmaceuticals

Help us take the next steps to strengthen America's domestic producers.

America’s Cost-of-Living Crisis Is a Wage Problem, Not a Price Problem

KEY POINTS