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Should Your Pay go Up with Inflation?

Inflation and wages

Welcome to Questions and Answers, a new section of God, Money and Me where we’re answering questions submitted by readers on Facebook, Twitter and here on the site. If you have a question about faith or personal finance, click here to submit it. We’ll answer your question in an upcoming post.

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Question:

What are your thoughts on inflation? Specifically should companies feel obligated to raise wages due to inflation?

— Jennifer, Kentucky

Answer:

Good question, Jennifer. Inflation should be on the mind of anyone who is carefully managing their money, and it should also be on the mind of anyone who determines employee compensation.

Inflation is an unfortunate and unavoidable part of modern financial life. It is influenced by many factors (including government spending and debt) and gradually makes our money less valuable over time. You notice inflation when your utility bills go up, when gasoline gets more expensive, when rents increase and when you see higher prices at grocery stores or restaurant menus.

It’s easy to get wrapped up in economic theory when talking about inflation, and we won’t go down that road. Here are the basics, though: In slow economic times, inflation tends to be low, hovering around or below 1% a year. When the economy is really humming, inflation reaches a higher rate. But government organizations and banks like  the Federal Reserve do their best to make sure that inflation rates don’t become so high that they negatively impacts the economy. (They don’t always do a perfect job.)

As an individual worker, inflation can put you in a tough spot. It drives up the prices of the goods, services and commodities that you count on the most, and there’s nothing you can do about it. And while those prices can increase suddenly at any time of year, your income probably does not. If you work for a set wage or salary, you may only get an opportunity for a raise once a year or so. Some companies don’t even give raises that often. So while prices are going up, your income may not be.

Many companies realize that inflation is putting pressure on their employees’ budgets, and they try to compensate for this by offering periodic “cost of living” raises. These raises aren’t based on performance or advancement; they’re simply attempts to account for inflation and keep your real income consistent. Some companies will match these raises to the exact rate of inflation, while others may just ballpark it, possibly giving you a little bit more than what inflation would dictate.

It’s obviously great when companies give cost of living raises to employees. And it seems that most managers, bosses and business leaders should want to do this. But life isn’t always that easy. Sometimes companies are in such a financial squeeze that they can’t afford to give even small raises. Other times you have managers that don’t understand the value of keeping good employees happy.

In the recession from which we’re still trying to emerge, inflation has been pretty low, but many companies have seen drastic drops to revenue and profit. Some owners have struggled to simply keep from laying people off (or even closing altogether). In very tight financial times, something as small as a cost of living raise can make the difference between solvency and insolvency. If your company has been battling just to stay afloat in this tough economy, I wouldn’t blame your boss for not matching inflation for a year or two. And if you’re concerned about the situation, have a conversation with your managers and see if they will commit to raising salaries once revenues return to normal.

What if this isn’t your company’s situation though — what if your company is doing big business and enjoying good profits? In that case, yes, your employer should be increasing your wage to match inflation. You could make a good argument that a profitable company has an ethical obligation to do this; my point is that it makes a lot of sense from a business and management standpoint. If employees know that their company is succeeding, but don’t see that reflected in their paychecks, they’re eventually going to become frustrated, disgruntled or bitter. If this goes on long enough, it will affect their work, which will in turn begin to drag down the company’s performance. The manager of a successful company should see pay raises as an essential part of maintaining employee morale and ensuring future success.

This philosophy goes beyond inflation, of course. Companies that succeed do so in large part because they have great employees, and wise managers make sure to reward those employees. This means promoting people that show promise, offering raises for increased training or skills, and even giving raises to people based on the experience and expertise that they’ve gained while working for the company. Good managers are always looking for opportunities to increase employee compensation, not looking for opportunities to tamp it down.

One final thought here: If you’re in a situation where your income is not keeping up with inflation, it could be time to work on growing that income. You can ask for a raise, pursue a promotion, take on new responsibilities or get additional training. If none of those opportunities are available to you, it could be time to look for a new job… somewhere you can thrive and advance.

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Photo by Paolo Camera. Used under Creative Commons License.

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Comments

  1. Your understanding of the economy is poor at best.

    • Care to elaborate?

      • “banks and the federal reserve do their best to keep inflation low” enough said. You need to research the Fed and central banking. They target 2% inflation annually typically. Year over year that compounds drastically. That isn’t price stability, that is highway robbery. You are well intentioned, but would do good to challenge your assumptions about our current banking system. Read Rothbard’s “what has government done with our monty” it is free at Mises.org.

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