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

Question

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

Answer 1

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.