In the last six years, an average of 31% of companies have given average raises of 3% or more. In 2022, 44% of companies intend to grant salary raises of more than 3%. Inflation was 7.5 percent higher in January 2022 than it was a year earlier, a 40-year high.
To keep up with inflation, how much need wages rise?
Work has gotten worse for many since the outbreak of the epidemic, further aggravating the issue. Due to the high incidence of employees abandoning their jobs, a smaller number of people are shouldering the workload that was formerly carried by a larger number of workers, adding to significant burnout rates. Not to mention the additional hazards posed by the pandemic itself, which include creating more hazardous work situations and adding more labor such as ensuring consumers are wearing masks.
“No one thinks when they sign up to be a cashier that that job will be deadly,” Molly Kinder, a Brookings fellow and the report’s author, told Recode, referring to the dangers that people working in front-line positions at places like grocery stores or pharmacies face if they become infected with the virus. According to Kinder, one Kroger employee she’s been interviewing isn’t sure if a raise will be enough to compensate for the increased stress.
“She’s been harping on the importance of a $15 minimum wage. “Is that additional tiny bit of money worth it when my mental health is suffering, it’s so unsafe, and I’m spending more at the pump?” she asks when she finally understands.
Inflationary pressures on salaries are projected to endure through 2022. According to a new poll of more than 5,000 employers across industries by compensation software business Payscale, 85 percent of employers are concerned that projected salary increases this year, which are already significantly greater than in recent years, will be undermined by inflation.
Fortunately for you, we’re in a once-in-a-generation historical moment where inflation is predicted to decline but labor shortages are not.
“According to David Smith, an economics professor at Pepperdine’s business school, “workers have more bargaining power, which can be a countervailing force to some of the difficulties we’re having,” such as income disparity. “In the long run, that would be beneficial.”
For the time being, those gains are required to keep up with the rising cost of commodities. However, if the price of products moderates, these long-overdue pay increases may have some real-world impact for Americans.
What employers are going to have to do about it
Employers suffer from inflation because they must spend more to keep their employees from looking for greater pay elsewhere. Employers may need to raise wages in line with inflation, provide better perks, or change how they operate in order to retain those workers.
The most basic solution is to raise salaries. In the six years that Payscale has been collecting this data, 44 percent of firms say they plan to provide average raises of 3% or more this year. Fewer than 10% are increasing pay by more than 5%, which is more in line with inflation.
“There are certain companies who simply go out there and say, ‘We have enough wealth, and we can go out and be dominant in salary as a differentiator,'” says one employer. Payscale’s chief people officer, Shelly Holt, stated. “When you look at a middle or smaller company, they might not have the luxury.”
To recruit and keep employees, these businesses will have to rely more heavily on other forms of benefits. This might entail, among other things, greater health care coverage, increased vacation time, and remote job choices. That corresponds to some of the insights gained during the Great Resignation.
“Employees want more than just a good salary. Pay is important, but employees also desire workplace flexibility and the opportunity to live better lives, which is changing how they think about perks and total rewards, according to Holt.
Companies are offering a greater choice of perks this year than they were pre-pandemic, according to Payscale. Prior to the pandemic, only 40% of the organizations polled offered remote work choices; now, 65% do. This year, the number of companies offering mental health and wellness programs increased by 7% to 65 percent. There were also modest increases in the number of businesses that provide four-day workweeks and child care subsidies.
According to Allie Kelly, chief marketing officer of recruiting platform Jobvite, the things that might help set firms apart require a shift in perspective, from treating employees like labor to treating them like people. This necessitates a constant reevaluation of offers in order to keep up with what’s vital to their employees.
“People have various perceptions and understandings of their own self-worth and what matters to them in life. Money is important, but it isn’t enough,” Kelly said, listing perks such as child care, shorter workdays, and more professional growth, as well as lower benefits and income.
While many of these perks may be less expensive than a 7.9% annual raise, they are not free. Companies must decide whether they can or should pass on those expenses to customers, which could worsen inflation, or whether they can simply swallow them as a cost of doing business. According to Erica Groshen, senior economics advisor at Cornell University’s labor school, this could entail opening for fewer hours, producing less overall, or cutting profit margins.
“Right now, and for a long time, we have historically high profit margins,” Groshen remarked. “As a result, it would not be considered a crisis in the past.”
The rising expense of human work is also hastening the transition from wage labor to automation, as has been predicted for some time. Robots, while expensive, do not demand more money and do not become ill during a pandemic.
Employers will replace people with robots to the extent that they can, according to Shivaram Rajgopal, a professor at Columbia University’s business school.
“Now you use a QR code to find the menu,” Rajgopal explained. “The next step is to simply place the order, and it will be delivered to the kitchen. We don’t require as many people to serve us.”
However, for those of us who haven’t yet been replaced by robots, the current employment scenario may work in our favor. That’s because, while inflation is expected to reduce, the demographics that are causing the labor shortage an entire generation of baby boomers retiring aren’t likely to change.
“I don’t think the power will suddenly shift back to employers,” said Kinder of the Brookings Institution. “If inflation moderates, some of these demand-and-supply difficulties moderate, and workers retain some negotiating leverage, that would be a good conclusion.”
To put it another way, your next increase may feel a lot better if you’re not spending as much for everything else, but we don’t know when high inflation will end.
This item has been updated with new inflation and wage data from the Bureau of Labor Statistics as of March 10, 2022.
Is a 3% rise sufficient?
An annual pay raise of 3% may not seem like much, especially in light of recent events in the world. But it’s better than nothing in today’s environment. Remember that little increments add up over time and can culminate in a very high pay.
What steps are employers taking to combat inflation?
The latter element, in particular, led to one significant adjustment for the year: a 10% reduction in employee healthcare rates in 2022, with no change in benefit levels.
“People are continually whining about the high cost of healthcare. “What our employees told us was that they wanted more money in their pockets,” Darren Burton, the company’s chief people officer, said. “The response has been overwhelming.”
KPMG isn’t the only firm concerned about and responding to growing inflation rates. According to the Consumer Price Index, the annual rate of inflation in the United States reached 6.8% in November 2021, the highest in more than three decades. Businesses areand should bethinking about how they can help, says Stephanie Naznitsky, an executive director with human resource consulting firm Robert Half. With those large hikes hitting employees in all aspects of life, employers areand should bethinking about how they can help. That urgency is amplified in today’s hot job market, where a large number of people are willing to leave their existing jobs in exchange for higher income and better benefits that can help with mounting costs.
“Rising living costs are affecting the entire workforce,” she explains. “This is something that employers should address.”
According to Naznitsky, rising inflation rates, among other problems brought on by the epidemic, have caused workers to re-evaluate their current status. “We’re currently in a candidate-driven market. There are more job opportunities than qualified applicants. Workers are aware that, as the cost of living rises, they can seek out alternative chances to improve their circumstances and balance some of the personal living expenses that have risen in recent months.”
When it comes to dealing with rising inflation rates, many companies are turning to a tried-and-true strategy: pay improvements, such as bonuses and salary hikes. According to a recent XpertHR survey, the typical percentage change for overall compensation budgets from 2021 to 2022 is 3%.
According to the Conference Board, companies are putting away an average of 3.9 percent of total payroll for salary hikes next year, the highest level since 2008. Despite the fact that these raises are bigger than in recent years, clever companies will almost certainly go even higher.
“Forward-thinking organizations who wish to overcome the labor scarcity should consider increasing their expected salary budgets by more than 3%, or look into how benefits other than pay can contribute to a great employee experience,” says Andrew Hellwege, XpertHR’s surveys editor.
According to Julie Stich, vice president of content for the International Foundation of Employee Benefit Plans, a nonpartisan organization with more than 8,200 organizations and 32,000 individuals as members, reexamining employee healthcare costs, as KPMG did, is one way employers often address rising inflation. With the latest inflation figureson top of pandemic concerns that are causing staffing issues and supply chain issues, which are projected to drive up healthcare coststhis is a hot topic this year.
“Employers should discuss whether or not to pass on anticipated healthcare expense hikes to their employees,” she says. “In this tight job market, employers may be hesitant to expand cost-sharing.”
To deal with mounting costs, an increasing number of companies are attempting to get creative with their benefit offerings. Employers may choose to invest in perks such as student debt assistance, daycare subsidies, or fertility benefitsservices that directly benefit an employee’s wallet. According to Stich, these investments frequently pay off for businesses.
“She emphasizes that “the benefits of attracting and maintaining essential individuals can quickly surpass any utilization costs.” “The significance of communication, as always, cannot be overstated. Employers must emphasize the importance of the advantages they provide to their workers.”
Employees can be more in control of moving away from expensive locations, for example, or cutting down on traveling to save on petrol or other transportation expenses, thanks to flexibility and remote work, according to Naznitsky.
“If you can assist in those areas, you may be able to save your employees from a difficult commute and commuting expenditures, or you may be able to provide discounts to help with other expenses,” she says. “Ultimately, the discussion revolves around starting salaries and sign-on bonuses, but we’ve seen employers get inventive in order to assist their employees and keep top talent.”
“Retention is critical, and if businesses don’t keep up with rising costs by altering compensation or bonus structures, they risk losing top people,” says Naznitsky. “Finding talent to add to your team is difficult in today’s industry. You don’t want to be in a scenario where employee turnover is harming morale and you have to replace talent on top of that.”
What happens if inflation continues to rise?
Inflation raises your cost of living over time. Inflation can be harmful to the economy if it is high enough. Price increases could be a sign of a fast-growing economy. Demand for products and services is fueled by people buying more than they need to avoid tomorrow’s rising prices.
How do you account for wage increases due to inflation?
The steps for calculating an inflation-adjusted pay increase are as follows.
- Step 1: Use the Consumer Price Index to calculate the 12-month rate of inflation (CPI).
- Step 2: Divide the percentage by 100 to convert it to a decimal (2 percent = 2 100 = 0.02).
What does a 5% raise entail?
If an employee obtains a $2,500 raise on her existing annual income of $50,000, her yearly salary will rise to $52,500. The result of dividing $2,500 by $50,000 is 0.05, or 5% (2,500/50,000 = 0.05). If you want to double-check your calculations, multiply $50,000 by 1.05 to get $52,500 (50,000 x 1.05 = 52,500).
Is a $10,000 raise sufficient?
That statistic includes inflation, but that’s all there is to it. Earning more today makes landing a higher-paying job simpler. Earning more now means you’ll be able to put more money towards your retirement. Now that you’re earning more, you’ll have extra money to invest.
It’s not easy to improve a job offer, but if you don’t attempt, you’ll likely be leaving over $500k on the table.
Do you want to see how much of a difference a one-time salary raise may make in your career earnings? Check out our Calculator for Career Earnings.
Setting yourself up for success is an important part of pay negotiation. Make sure you answer the dreaded “what’s your target compensation? inquiry effectively.
And, if you’ve received an offer, think about collaborating with someone from our team to maximize your final offer.
What is a reasonable wage increase?
In normal circumstances, many employees would consider a 2.5 percent salary increase to be reasonable, if not too generous. However, given the current economic context, many employees will believe that 2.5 percent is excessive.
This is primarily due to two factors. To begin with, the current rate of inflation is 4.2 percent. This means that those on fixed incomes will be worse off next year unless they receive a wage raise that keeps pace with inflation.
As a result, a normal 2.5 percent raise will leave workers in a worse position next year. That’s before you factor in an extra year of experience on the job.
On a similar topic, it’s no news that the UK is now experiencing a labor shortage. According to the CIPD, the percentage of companies reporting difficult-to-fill openings has risen to 47%. This figure was only 38 percent three months ago when the poll was performed. Furthermore, employers’ ‘hiring intentions’ are at an all-time high, according to the CIPD’s poll, which began in 2012.