Hearing impaired (HI) people often have difficulty understanding speech in multi-speaker or noisy environments. With HI listeners, however, it is often difficult to specify which stage, or stages, of auditory processing are responsible for the deficit. There might also be cognitive problems associated with age. In this paper, a HI simulator, based on the dynamic, compressive gammachirp (dcGC) filterbank, was used to measure the effect of a loss of compression on syllable recognition. The HI simulator can counteract the cochlear compression in normal hearing (NH) listeners and, thereby, isolate the deficit associated with a loss of compression in speech perception. Listeners were required to identify the second syllable in a three-syllable “nonsense word”, and between trials, the relative level of the second syllable was varied, or the level of the entire sequence was varied. The difference between the Speech Reception Threshold (SRT) in these two conditions reveals the effect of compression on speech perception. The HI simulator adjusted a NH listener's compression to that of the “average 80-year old” with either normal compression or complete loss of compression. A reference condition was included where the HI simulator applied a simple 30-dB reduction in stimulus level. The results show that the loss of compression has its largest effect on recognition when the second syllable is attenuated relative to the first and third syllables. This is probably because the internal level of the second syllable is attenuated proportionately more when there is a loss of compression.