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
I’ll approach the answer from the employee perspective. Staying with an employer is much easier than job hunting while employed. Employees that accept the position they’re in with whatever raise they do or don’t get are choosing the easier yet lower money making decision.
The easiest ELI5 explanation is it’s the employees fault. If an entire factory or store quit at one time because the raise was substandard. This would change almost over night
>Doesn’t that just mean employees get poorer every time?
To answer this particular point: over the long run, in most countries, wage growth has outpaced inflation. That’s why in general people in the UK are wealthier now than 50 years ago, despite all the inflation in that time.
However it’s not uncommon for wage growth to lag behind inflation when it’s high and then outpace inflation when it’s low. That’s not a guarantee (in the UK we’ve just had a long period of low inflation and poor wage increases) but over the long-term it tends to happen.
First off, there’s nothing forcing them to give raises equal to inflation.
Secondly it’s not always that simple. LIke, I work for an auto parts manufacturer. Their contracts for the parts they produce are for multiple years, generally 10-20 years. And while there may be stipulations that to amount we are paid for each part goes up yearly, that amount is going to be pretty static. And there is no way to predict how much inflation is going to be a year from now, let alone 10-20 years from now. So if they are only getting paid a couple of % more per year, but inflation goes up more than that, raising wages the same % as inflation is going to be an issue. Especially when all of their costs have also gone up.
Companies are incentivized to get as much labor for as little cost as possible. The end goal is profits. Paying employees more costs them profits. Not paying employees enough costs them labor, which **may** or may not impact profits.
The main issue is employers can usually go short staffed for a little bit while they look for new employees. Employees generally can’t go very long without income before they start losing things like food and housing.
The the employer has more leverage in this game and is usually the one to get away with paying less because there’s a larger pool of people willing to work for less than the ones willing to hold out for more pay.
The smaller companies won’t have this flexibility, but a company like amazon can lose hundreds of people and just shuffle who’s left around without losing a step.
It’s only when the people unite in mass, like unions that they start to worry.
“Get away with”? Employees are mostly paid the rate established by the market for their services. That definitely can get out of whack for a period of time at a given company or a given market, however, so sometimes employees get larger raises and sometimes they get smaller raises (or no raise). If cybersecurity is a hot industry for five years, then cybersecurity employees might see 10-15% annual raises for a while, especially if they’re early in their career. Suddenly there’s a tech recession and cybersecurity tools start including AI features that reduce staffing needs, and cybersecurity employees might see layoffs and wage stagnation for a while.
Companies don’t set pay rates to either screw employees or to enrich them. They set pay rates to maintain the employees they think they need.
Why do you think companies can “afford” to increase wages equal to inflation without losing profit?
Looking at a specific example: aluminium forgery that’s very, very dependent on energy price. Cost for energy went up a factor of 4 at a certain point. Sales price could not be increased. How would that company not increasing wage by inflation screw over their employees?
Or governments, their income is tax. Should they increase tax (in absolute numbers) with the inflation in order to be able to pay increased wages?
Most of us are in a “Sword of Damocles” situation where one wrong move can bring you all the way down. Outside of union jobs, only those who have the means to support themselves with or without their job have any real bargaining power.
Because their employees accept them. It’s beena long time since someone could force you to work for them in America. If you don’t like the compensation, employees can leavea nd take better-paying jobs. IF there are no better-paying jobs for your skill-level in your career iun your area, then it looks your employer is paying appropraite competetive wages.
If you don’t like your raise, quit and go work somehere that pays you what you want.
if everyone’s salary is inflation adjusted, then inflation will become rampant leading to insane salaries and even more insane inflation. That said, yes, you effectively lose purchasing power when this happens.
However, let’s be clear. Lots of people have fixed debt. Inflation is a godsend to you if you’re paying off your mortgage or student loans for example.
Let’s say everyone suddenly makes 1000x their current salary, but prices go up 1000x. Off hand, you’re neutral right?
Except you’re not. If you’re cash heavy, all your savings become 1/1000th of what they were. Having $10k in the bank doesn’t go as far to buy food when your $200 grocery bill suddenly becomes $200,000 does it? But the fact that you’re $80k job is now paying $80M offsets it. Your savings takes a hit, but your monthly budget is neutral.
However, if you have a mortgage or student loans, your debt doesn’t go up because of inflation. Even if you have old CC debt, that won’t go up because of inflation. Suddenly your $200k mortgage seems like nothing when you’re making $80M a year, right?
So yes, you lose purchasing power when you get a raise below the rate of inflation, but it doesn’t mean you’re worse off.
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