Quartz:Will high inflation lead to bigger pay increases?

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Inflation has come for the sad desk lunch. The average price of a humble wrap is up 18% in major US cities compared to a year ago, according to the Wall Street Journal, while the cost of a sandwich is up 14%.

That’s just one sign that companies should be steeling themselves for a barrage of raise requests from workers looking to keep up with the rising cost of living. In the US, inflation is up 7.9% from a year ago, according to the most recent data from the Bureau of Labor Statistics. In the UK, inflation rose 6.2% on an annual basis—the biggest jump in three decades.

“We were in this long period where general pay raises often came in on the order of 2-3% to reflect cost-of-living increases in a low-inflation environment,” says Jake Rosenfeld, a professor of sociology at Washington University in St Louis and the author of You’re Paid What You’re Worth: And Other Myths of the Modern Economy. Now, he says, “there are plenty of employers who aren’t matching the recent inflation increase with a similarly sized compensation adjustment.”

In a tight labor market, employers that can’t, or won’t, offer pay bumps commensurate with inflation may be at higher risk of losing workers already predisposed to look for new jobs. “In general, when the labor market is hot, people have their ears to the ground,” says Paul Oyer, a professor of economics at the Stanford Graduate School of Business.

Should employers increase pay for inflation?

Inflation is changing expectations about what a decent pay raise looks like. In a recent survey of roughly 2,500 UK workers from the talent management platform Beamery, 47% said that their employers were not matching the rising cost of living. Among workers looking for a new job, the leading reason was the lack of a salary increase at their current role.

Employers are aware of the issue. In a recent Payscale survey of 5,578 organizations in the US and Canada, the vast majority said that they were concerned about inflation eroding the value of pay increases. And almost half of organizations said they planned to give raises above 3% this year—up significantly from an average of 31% over the past six years.

With US corporations racking up the largest profit margins in 70 years, big employers are presumably in a decent financial position to boost pay. Rosenfeld cautions, however, that “publicly traded firms are under enormous pressure to deliver record profits to shareholders.” With both workers and investors demanding more, “how that shakes out in terms of the actual distribution of company revenues will be interesting to watch in the months ahead.”

For companies that decide to give raises on par with inflation, Oyer says that doing so won’t necessarily put a stop to resignations. After all, the best way to get a pay bump is to change jobs.

But it may make a difference to people who are uncertain about whether to stay or go. For someone who was thinking, ‘I’ll just send out a resume and see how it goes,” Oyer says, “now they’re going to be like, ‘Okay, well I just got a 6% raise, then I might as well stick around for a while.’”

Why some companies give raises that don’t match inflation

Smaller employers, meanwhile, likely won’t be able to afford to distribute 8-10% raises across the board—the amount that would be necessary to ensure that workers are making real wage gains. But that doesn’t mean small- and mid-size employers are doomed to lose workers to better-paying competitors.

“If they want to compete, especially if they’re in an environment where they’re competing with larger firms, they have to get creative,” says Rosenfeld. Offering a four-day work week, for example, could allow employees to still feel that they’re getting more money in exchange for their time.

Even if companies can’t offer raises that compensate workers for inflation, they should acknowledge the impact of rising costs on workers’ paychecks, according to Anthony Klotz, an associate professor of management at Mays Business School at Texas A&M University who coined the term “Great Resignation.”

“We know from years of research on fairness at work that employees can take bad news, like even a furlough or a pay cut,” Klotz says. But employers need to be transparent about why inflation-adjusted raises aren’t happening right now, and how they plan to make it up to employees. “You may say, ‘A year from now, if these things happen, you will be in a position where I could give you all a bonus or give you all raises.’ Really engage employees in that conversation.”

Will increasing wages cause inflation?

Looking at macroeconomic data, inflation-adjusted raises don’t yet seem to be materializing. While pay has generally gone up in the US over the course of the pandemic thanks to high worker demand, wage growth slowed down in February. And data from the Bureau of Labor Statistics (BLS) shows that wage increases for private-sector workers haven’t kept pace with inflation in recent months.

That’s not necessarily a bad thing. One concern about inflation-based raises is that higher wages can also feed inflation.

“When the labor market is tight, firms bid up wages, which is what we’ve seen going on right now,” Oyer explains. As the cost of labor goes up, companies may pass those costs along to customers in the form of higher prices. Those customers then ask for raises from their own employers so they can afford the higher cost of gas, rent, and groceries, perpetuating the cycle.

But higher wages don’t necessarily lead to higher consumer prices, Oyer notes. Some businesses pass the higher cost of labor onto other businesses instead. Strong productivity growth can also offset higher labor costs: If companies up their output, they can afford to keep consumer prices relatively steady without cutting into profit margins.
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