Should businesses raise wages when inflation increases?
- In American English, the first use of the word 'inflation' in a monetary sense was recorded in 1838, referring to an 'enlargement of prices' (originally by an increase in the amount of money in circulation).'
- Investopedia explains that inflation—and its opposite, deflation—are monitored and addressed via monetary policy, 'Central banks keep a keen eye on the levels of price changes and act to stem deflation or inflation by conducting monetary policy, such as setting interest rates.'
- The US Bureau of Labor Statistics reports that from March 2021 to March 2022, the average weekly wages in states such as Florida, Maine, and Arkansas increased by over 10%.
- Statista reports that as of September 1, 2022, inflation in the US 'has soared from 1.4 percent in January 2021 to a high of 9.1 percent in 2022.'
It is in a business's best interest to raise wages as inflation increases. Inflation is characterized by a rise in the cost of living while the value of savings is simultaneously reduced. As inflation increases, a worker's salary that was at one time sufficient to provide for their needs may no longer be, which can cause hardships and stress for the workers and their families through no fault of their own.
Because employees have less buying power, their paychecks will not go as far. They will have to forgo essential needs, such as healthy foods, childcare, and preventative medical treatments, the consequences of which are increased social services costs and decreased productivity.
Many of inflation's rising costs are directly related to one’s employment, as is the case with commuting to work amid increased gas and vehicle maintenance prices. These employees, who are less financially secure, have higher rates of anxiety and mental health issues. And as such, they are less effective in the workplace, ultimately hurting the company.
Life for workers only gets harder and harder as wages and savings decrease relative to buying power. In extreme cases, this can lead to homelessness, removing people from the workforce and hurting everyone involved.
Ethically minded businesses should always ensure a living wage, meaning that as costs increase, so should salaries and other forms of compensation. This should also apply to pensions and retirement plans, as today, many of those interest rates are below inflation and are losing value. At the end of the day, the companies that are proactive in responding to changing socio-economic landscapes thrive through volatile times.
In business, owners and CEOs must determine their company's earning potential and allocate percentages of those earnings to payroll, overhead, supplies, marketing, and more. For a business to remain sustainable, it must function within budgetary limits.
During times of inflation, the cost of goods and services needed to continue doing business increases, severely disrupting the forecasted budget of a business to function. And not surprisingly, the pressure of making financial adjustments can be hard on business leaders. Raising wages based on the state of the economy rather than the state of the company itself adds an additional layer of pressure and stress.
Once wages are raised, employees expect them to remain there even after the inflation era stabilizes. Revoking them would lead to a considerable risk of employee resignations and damaging morale, potentially changing the entire culture of a business. And a recent survey of 5,000 people showed that the majority found company culture more important than earnings. As COO Amy Felix Reese says, 'We have to look at total compensation, of course, but people will stay for the soul and depth of an organization even if it's not the most financially competitive.' Inflation-based wage raises do not necessarily ensure employee retention. Merit raises, however, are a great way to ensure a sustainable business that continues to grow and flourish. The encouragement employees feel after being recognized for their hard work increases their loyalty to the company. And this loyalty leads to increased productivity ensuring further growth and success of the company.
Inflation ebbs and flows; it's unrealistic to base a salary on a fluctuating number over which a company has no control.