Today’s labor market and economy are truly unique. The demand for labor during the pandemic recovery is fierce and quit rates are at record highs. Employees and employers across the United States are feeling the effects of inflation at its highest level since 1982. When the national labor shortage is combined with the declining value of the dollar resulting from inflation, it becomes clear why expectations around employee compensation are changing.
The inflation rate and its effect on take-home pay
The Consumer Price Index (CPI)—a measure of the average change over time in prices paid by consumers for a market basket of consumer goods and services—increased 6.8 percent from November 2020 to November 2021. Over the past 12 months, food prices rose 6.4 percent, energy prices rose 33.3 percent, and the price of used cars and trucks increased 31.4 percent.
The CPI is used to measure inflation by tracking the changes over time in the prices paid by consumers. A fixed income—combined with rising prices— decreases a worker’s ability to purchase the same number of goods resulting in an increased cost of living.
The inflation rate has a direct effect on a worker’s income. When an employee’s salary increase is less than the inflation rate, it results in a loss of purchasing power. A worker earning $40,000 in 2020 is equivalent in purchasing power to about $42,957.00 today. To put things in perspective, compensation is now lower than it was in December of 2019. To determine the effects of inflation on your purchasing power, use an online inflation calculator.
Keep in mind that even though the CPI is at its highest level in almost 40 years, it doesn’t mean that inflation will hit every worker the same. People purchase different products and services, making everyone’s true inflation rate different. Lower-income households are impacted more by inflation because they spend a higher proportion of their income on essentials such as food, energy, and transportation.
How the inflation rate is affecting compensation expectations
Today’s tight labor market has given workers the upper hand for the first time in at least two decades. Combine that with strong inflation and employers can expect greater demand from workers for a cost-of-living adjustment in 2022. What can workers expect in return? Here are things to look for as we head into 2022.
Salary increases: In the year ending in September, wages and salaries soared 4.2 percent, the biggest gain on record dating back 20 years. A National Salary Budget Survey by Salary.com found 41% of organizations will have a higher salary increase budget in 2022 than they did in 2021. Trading Economics sees compensation trending up 3.6 percent in 2022 and 4.0 percent in 2023.
However, just because inflation is at a 40 year high, it doesn’t mean employers feel obligated to cover the entire increase. Inflation is negatively impacting companies and increasing their fixed costs as they work to rebound from the pandemic. After being a non-issue in wage determination for several decades, inflation in 2021 is likely to be well above salary increase budgets, The Conference Board’s Salary Increase Budget Survey found. Raising base pay for highly compensated employees has a permanent effect on an organization’s fixed costs. Therefore, companies are going to be hesitant to raise salaries at the same rate as a historically high inflation rate that is likely to level out next year.
To avoid permanently impacting their fixed costs, companies are turning to other methods to reward employees. Compensation is more than just a salary as organizations are differentiating themselves through total rewards and hybrid work arrangements by offering items such as the following:
Bonuses: One-time performance and retention bonuses give companies the ability to increase an employee’s pay without the risk of locking in raises into future years.
Perks: Tuition reimbursement, gift certificates, gym memberships, and discount programs—on items such as car insurance, wellness, daycare, and tutoring—offer organizations a way to reward their workers while helping to decrease their expenses.
Flexibility: Workers value employers that empower them to manage their own time and give them the flexibility to utilize their time most efficiently. Employers are listening! When asked about talent shortage strategies, a recent West Monroe Executive Poll found that 57% of executives plan to offer employees more flexibility in where they permanently reside. A hybrid work model offers employees many benefits such as an improved work/life balance, flexibility in child care, more time for daily exercise, and cost savings.
Professional development: To help their employees feel engaged and valued, companies are offering reimbursements for workshops, seminars, and continuing education classes.
Companies are increasing wages to attract and retain talent and account for inflation. These salary increases will help bridge the gap between their employees’ fixed income and the increased cost of living but may not be enough to cover the entire amount. Employers and employees need to be open to other reward methods while we all work to navigate this unique time in history.
This blog was written by Broadleaf’s Vice President of Client Delivery Suzie Mitchell.