How do companies get away with pay rises less than the rate of inflation?

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I understand that there are shareholders and costs increase, but surely the cost increases should be at the rate of inflation?

I know a load of companies increase by like 3.9% + Inflation every year – so why is it that when employees get pay rises they’ll always be less than the rate of inflation?

Doesn’t that just mean employees get poorer every time? Where does the extra 3.9% money actually go? Where does the difference between employees payrises and rate of inflation go?

Are all companies just screwing their employees or is there some other reason I’m not realizing?

In: Economics

20 Answers

Anonymous 0 Comments

As long as their employees are willing to accept those raises and don’t threaten to leave in demands of better pay, there’s no inherit pressure to offer higher raises.

Anonymous 0 Comments

When it comes to capitalism and unethical (but profitable) behaviour, the question you must ask is: “What would make the company *not* do the bad thing?”.

So, what would make a company give employees a raise generally? They want to keep their employees.

So, why not give them a raise to match inflation? They do not think they will lose their employees if they fail to give them an appropriate raise.

After all, if they can get away with paying their employees less (adjusted for inflation), that’s money in the bank, money for the shareholders, money for the chief execs. A company will always pay their employees the smallest amount they believe they can get away with. And if they know that other companies are also not giving substantial raises, then there is nowhere for their employees to go to try and get a better wage anyway!

Anonymous 0 Comments

The cause of the current inflation is shortages. IE, there is less stuff being produced per person than there was pre-Covid.

When shortages are the cause of inflation, there is no way for wage growth to outpace inflation simply because money does not cause stuff to magically pop into existence. As people get paid more money, stores sell out of stuff quicker and raise prices until they’re no longer selling out of stuff. The reason the store is no longer selling out of stuff, despite the shortage, is because the price increases outpaced the rate of wage growth.

Anonymous 0 Comments

Simply, it is because employees will take it. Unless they actually leave or negotiate an agreement, companies are going to pay as little as possible to retain employees. It can vary by company/industry. My company is obligated to raise pay by inflation +1.5% with additional raises determined individually.

Anonymous 0 Comments

On average, yes, that would mean that employees are falling behind — in “real dollars,” they’re making less every year and so their purchasing power is declining.

BUT…. that doesn’t necessarily mean that each individual employee is falling behind. And it doesn’t mean that employers are trying to “screw” anybody. Here are some factors in the other direction:

(1) Inflation is an average — prices of some goods and services will increase less than the prices of other goods and services. And some might even go down. If your employer makes things that haven’t gone up much in price, then they won’t really have the extra money to pay employees. Clothing, for example, didn’t have the same run-up as, say, new homes. So, if your company sells clothes, its prices haven’t gone up as much, so its ability to pay employees more also hasn’t gone up as much. They may WANT to pay more, just not have the ability to do so.

(2) Because Inflation is an average, it affects different people differently I owned my home and had a mortgage before COVID. So, I haven’t been affected by the big run-up in housing prices. As a result, the rate of inflation that I experience is lower than what somebody else experiences.

When thinking about this, something to keep in mind: When we think of “companies,” we usually think of big companies with billions of dollars in revenue. But, most people are employed by small companies. For those small companies, there may only be one shareholder, and it happens to be the same guy who shows up every day to run the place.

Anonymous 0 Comments

You are spot on – the companies are screwing their employees. But that’s nothing new (generally). We don’t expect a company to pay more than it has to for a new computer system or a new assembly line machine. Employees are not considered any differently – if you can get the labor you need for $10, you’re not spending $15 as an employer. Doesn’t matter what things cost, what’s going on with inflation, etc. (except to the extent those things make employees hold out for better wages).

Anonymous 0 Comments

“Because they can”.

That’s it. That’s the entire answer. They give crapass raises *because they can*. Their employees aren’t quitting and they are not legally obligated to give you a single penny more…so they don’t.

Anonymous 0 Comments

>I understand that there are shareholders and costs increase, but surely the cost increases should be at the rate of inflation?

Inflation is average. Maybe the costs for the stuff a cat food factory needs to make cat food increases by 6%, but the cost for stuff a TV set factory needs to make TV set increase 2%.

>why is it that when employees get pay rises they’ll always be less than the rate of inflation?

Absent minimum wage laws, labor is worth what someone is going to pay for it and people are apparently still willing to work for increase that are less than what overall inflation is in society. Turns out most people would rather work for an effective decrease in salary than lose their house and go live in a cardboard box.

I’ll also note inflation affect people differently. If you’re locked into a 30 year fixed -rate mortage, your payment basically never increases even though inflation is making it easier to pay your mortage back- maybe your pay has increased 2% instead of 3.9% per year, but your mortage increase will effectively stay at 0% for the next 30.

Anonymous 0 Comments

Because there’s always been some number of unemployed people willing to work for less than the next guy.

Anonymous 0 Comments

Best way to think about this is to ask the opposite question: “how do companies get away with pay raises that *exceed* inflation?” (since that’s been common prior to recent inflation) or “why would employees accept a raise higher than inflation?” (since they’re taking money that could be given to someone else).

The longer answer is that wages and raises don’t correlate directly with inflation, rather they’re directed by market forces of which inflation is just one factor, just like the prices you pay for gas, or groceries are.

Employers seek to balance multiple forces, including the cost of their employees (and the costs to retain them rather than lose them to competitors), and the revenue those companies’ products and services bring in, which drives profits, which is the sole reason companies exist to begin with. As conditions change, including *forecasted* conditions, companies may tighten their belts, accepting the risk that they might lose some employees if other companies are continuing to offer more attractive compensation packages. During economic uncertainty, however, those competitors are often making the same calculations, and you end up with a market that just doesn’t support higher wages or raises.

There’s no good or bad here really (though there’s political incentive to say so), it’s market forces and human incentives at work.