What Future-Seeking Leaders Need to Know About Inflation and Salary Increases

Consumer inflation and the labor market, along with just about anything related to the economy and the world in general, were slammed and tossed violently around by the Covid-19 pandemic. Recovery and ongoing management of pandemic-related issues are still underway.

What does the current landscape look like as you plan to effectively manage your workforce – and your HR budget – going forward?

Salary increases are not keeping pace with inflation.

While the two generally trend in the same direction, salary growth and inflation are driven by different inputs. Currently, the U.S. inflation rate stands at 8.54 percent; it has ricocheted from 14.93 percent to 2.62 percent in recent years.

• Low-inflation periods tend to be to employees’ advantage. Either way, while inflation simply represents changes in the cost of consumer goods, wages are impacted by shifts in supply and demand for labor. These shifts may be caused by a number of factors including demographic trends, labor participation rates, technological advances, or growth in productivity.

Wage increases are sticky.

“Sticky” means that wages generally don’t go down unless there are significant structural issues at play. It’s difficult to lower wages if markets deteriorate. And likewise, companies are cautious about raising them until they are sure of the long-term implications.

• When the U.S. unemployment rate skyrocketed from 3.5 percent in February 2020 to 14.8 percent two months later, employers generally did not decrease individual salaries. In fact, pay rates were raised for many jobs due to demand for essential workers during the height of the pandemic. Now that unemployment is back to pre-Covid levels – it stood at 3.6 percent in March – employers are evaluating long-term trends before making any drastic salary moves.

Pre-pandemic salary budgets were already reflecting labor market demographic shifts.

Not everything has to do with Covid. A perfect storm was already brewing before March of 2020, as talent availability was dropping in many industries, at both entry and leadership levels. For instance, the U.S. labor force shrunk from 2010 to 2019 in the 16 through 24-year-old age group, which typically reflects entry-level workers, as well as workers aged 45 through 54, who tend to make up company leadership. And then, wham! Virtually overnight, there was a pandemic-driven seismic shift.

In the ensuing two years, there have been some rises in individual pay levels; namely, to attract new workers at entry levels. There have also been salary hikes for individuals who have changed jobs, either through promotions or by moving to new employers. Benefit costs have also increased. None of these factors were captured in salary budgets, but nonetheless reflect real increases in employer spending.

It’s a lot to absorb – not to mention manage on a regular basis.

For small to mid-sized businesses, one of the benefits of working with a professional employer organization (PEO) is gaining access to specialized expertise in salary and other aspects of HR management. If you feel your team could use the extra bandwidth and ongoing support, you may want to consider a PEO or similar partnership. To learn more, reach out to Key HR today.