How is the junior Chipmunk meeting, dear?
It was good.
Why would you need a fly?
Wow. With beef at $0.68 a pound.
I can't blame.
A show that takes place in the fifties.
Already in the eighties when it aired, drawing
attention to high inflationary prices.
Could you even imagine thinking $0.68 a pound
was a lot? The average price in the United
States per pound for beef is now about $5.30.
If the cost of everything keeps going up, it'll
wreck the economy and make life a living hell
for American families.
Inflation in the US hit a record high in June 2022.
Consumer prices soared by 9.1% compared to a
year prior, the largest annual increase since
1981. While wages are rising, they're not
keeping up with inflation. Wage growth
has been consistent within about four and one
half percent inflation rate. Meanwhile, as of
November 2022, inflation was at 7.1% and Americans
are feeling the brunt.
Two thirds of workers say their pay isn't
keeping up with these higher prices.
Part of the misconception is people believe, Oh, if
I'm only getting a 4% salary increase and
inflation is 7.7, I'm getting a pay decrease.
That's not true.
So what exactly is happening and why?
Why aren't salaries keeping up with
inflation?
Inflation measures, how much more expensive a set
of goods and services has become over a certain
period of time, usually a year.
There are a number of reasons why inflation
fluctuates, but at the heart of it, it's basic
economic principles.
Supply and demand.
More money in people's hands means increased
purchasing power with more demand for goods and
services and supply remaining, the same
prices will go up.
The COVID 19 pandemic is an extreme example, but a
good illustration of my point here.
At the onset, the world shut down.
Consumers weren't spending and instead
saving. The government flooded the market with
cash. A national eviction moratorium, loan
payment, pause and other initiatives put more
money in Americans hands. As restrictions
started easing, people began spending again.
But at that point, companies weren't
producing as much due to supply chain disruptions
caused by closed borders, labor shortages
and shipping delays.
Money supply growing at a faster rate than the
economy's ability to produce goods and
services causes inflation this time.
Record breaking inflation.
A key inflation.
Gauge is sounding alarm bells and it could have a
big impact in grocery stores, especially the
latest UN Global Price Index shows food costs
reached their highest level in nearly a decade
last month, thanks in part to supply and
logistics.
Issues as the pandemic was winding down in
February 2022.
Russia's invasion of Ukraine only exacerbated
the pressure, raising commodity prices and
increasing supply chain issues.
Just like inflation, wages are driven by
changes in supply and demand.
But for labor, they're determined by market and
demographic factors.
So when job availability, as well as
the number of people who qualify and are looking
for a specific job change, so do wages.
Laurie Whisper is a managing director at
Willis Towers. Watson For more than 35 years,
she's helped companies set their compensation
strategies.
Pretty much everybody's compensation philosophy
is grounded in the desire to attract and
retain employees by paying competitively.
Organizations look at what is the cost of
labor? What do I have to pay in a given market for
a given skill set or job?
And that's how I'm going to set my pay rates.
They don't look at the cost of living.
Organizations typically determine salary budgets
a few years out, so making sudden and
significant adjustments in wages is unlikely.
Companies like to wait and see if market
conditions will be long lasting before making
those changes. How would you feel if your boss
gave you a raise and then shortly after cut
your salary?
Most organizations do take a relative
conservative approach to looking at base salary
increases. Even a one or a one and a half percent
increase can represent hundreds of millions of
dollars for an organization. They need
to be good governors of those payroll dollars.
That's part of how they run their business.
A very important part.
Organizations down the road do not want to be in
a position of feeling or believing or factually
overpaying their people.
And they don't want to find themselves in a
position where they have to reduce wages or even
worse, cut jobs.
Layoffs. You know, just today, Twitter has half
the staff. You see Lyft, Apple, Amazon.
It goes on.
Us based employers cut nearly 34,000 jobs in
October 2022.
Technology companies took the lead with about
9600 cuts for a total of more than 28,000 cuts so
far this year, up 162% from the same period last
year.
The high tech industry e commerce has been one of
the highest paying industries in the US.
Their salary budgets last year were higher
than anybody else's meaning.
They were giving greater salary increases than
most other industries.
So that's a good real life example of what
happens when you overspend relative to
what others are providing in your
competitive labor markets. We simply
haven't seen anything like this since the
1970s.
Record inflation has only made things worse.
Still, organizations typically don't consider
inflation and the cost of living when
determining wages.
While economists say salaries can keep up with
inflation, Whisper says they shouldn't.
I know that's going to be controversial for me to
say. As employees, as people, we get to make
choices on what we buy and how we use our buying
power. Companies don't tell us where to live and
what to buy. As a company, if I looked at
the cost of living and said, okay, I'm just
going to take the national average of
inflation and match my annual salary increase
budgets, to that, I'd be overpaying what the
market pays for Almost every job.
That overpayment might cause me to do some
things in the future that would hurt
everybody.
Like what we're seeing in the tech industry.
When the salary increase budgets drop as a result
of the economic downturn, they kind of
stick. They're not very elastic.
Inflation goes up and down quite a lot.
Salary increased budgets don't because they're
driven by different things.
What most organizations do is they compensate
workers in other ways that won't automatically
drive all future earnings up regardless of
economic conditions.
For example, when many organizations perform
well, they reward their employees with bonuses.
Profits go up and down, financial performance
goes up and down. So variable pay programs are
best suited to reward for those when we have
low inflation and high salary budgets.
Employees benefit, but at no time in the past
when our buying power was greater than the cost
of things we bought, did we say, Oh, let's lower
it because we want to match that?
Employers also have hidden increases in
compensation. The increase in cost of
benefits and attracting new talent.
And some organizations are seeing their costs go
up in different ways.
Travel nurse jobs pay substantially more than
what they were getting paid to work in a
hospital. But in a lot of hospitals around the
country, they're seeing their nurses quit sign up
as travel nurses in the hospitals so short
staffed they're hiring the travel nurses.
So it's the exact same nurse coming back at a
higher wage.
However, that increase in salary is offset with no
benefits or job security.
Overall, middle income Americans are feeling the
largest impact from inflation.
Higher earning workers were more likely to say
their incomes held up with the increase in
prices. 53% of those earning $100,000 or more
per year, compared to 34% of those earning less
than $50,000.
The biggest increase in labor force participation
among people with higher education and among
people with less education like just a
high school degree.
And as the people in the middle who have maybe a
two year degree where we've seen the slowest
recovery in going back to work.
Typically, lower income families struggle the
most during high inflationary times.
However, in the past year, on average, low
wage workers experienced real wage growth wage
growth after adjusting for inflation while
middle and high wage workers didn't.
On average, wages have kept up with inflation at
the bottom end.
But that doesn't mean that there aren't lots
and lots of people where their wages haven't kept
up. Maybe their market conditions are such that
there hasn't been forces pushing the wages up.
Maybe they're in a job that they just haven't
been able to change because of their
circumstances or their childcare.
So what would happen if salaries did keep up?
We want wages to go up.
We just want them to go up at a level that's
sustainable and consistent with 2%
inflation.
In November 2022, Federal Reserve Chair Powell said
the Fed doesn't want to see a wage price spiral,
rising wages increasing the demand for goods
causing prices to rise.
Increasing the demand for higher wages, which
then leads to higher production costs and more
pressure to increase prices, creating a cycle.
And once you see it, you're in trouble.
We get this wage price spiral where workers want
a 5% raise because they anticipate next year
there'll be 5% inflation. But their
action makes it a self-fulfilling prophecy.
We get 5% inflation, so they do the same thing
the next year and we get sort of stuck at that
high inflation rate.
The most effective way to keep wages trailing
inflation is by changing jobs.
Those who switch jobs between April 2021 and
March 2022 saw earnings jump by nearly 10% from a
year earlier. Those who stayed.
So we just fall nearly 2%.
Another way employees can see a boost in their
earnings is through cost of living allowances,
although those may disappear if inflation
goes down again. There are also opportunities to
negotiate for other perks like free meals or
snacks, child care or housing assistance, more
paid time off student loan assistance or
transportation reimbursement transfer to
a location where the cost of living is lower
or an extended timeline for remote work.
Every organization has a different philosophy when
it comes to compensation. They create
strategic plans, taking into consideration the
industry, competition, company culture,
financial, health and goals for the future.
For some, that means trying to make sure wages
keep up with inflation.
But for the most part, that's just not how it
works. And if that's a problem, it's up to you,
the employee, to decide your next move.
Other than treating people poorly and taking
advantage of them, there is no right philosophy.
The whole key with your compensation philosophy
is what are you doing so that you feel you're
doing the right thing for your organization and
for your people.
It's always a good idea when there's lots of
opportunities out there to take a look and see if
you might just find something a little bit
better for you.
And as for keeping inflation down, the
government and the Federal Reserve are
working on it. Fed Chairman Powell says the
country is battling inflation head on.
The central bank has raised interest rates and
will continue to do so until inflation is under
control. Meanwhile, in August 2022, President
Biden signed the Inflation Reduction Act
of 2022 into law.
The spending package is expected to reduce the
deficit by more than $300 Billion in the next
decade. It's not a fix that will happen
overnight, but there's hope.