Friday, May 17, 2024

Raises and Inflation

I'm embarrassed to admit that it was alarmingly late in life that I realized that part of the reason workers get (and expect) raises each year is to account for inflation.

In my head, for most of my life, I associated a raise solely with being rewarded for performance and/or seniority. As you advance in your career, you (hopefully) become more effective, take on more responsibilities, develop additional competencies, etc.. That makes you more valuable to your employer, and so in turn, you get more money. It would of course be possible that in bad economic times one's employer might not have the money to give you a raise. But the raise you do get is meant to be an advancement -- it improves you vis-a-vis your position in the year before. By the end of my career, assuming I stay on the same professional arc I'm on now, I should be making more money than at the start of it.

This is one function of a raise. But because of inflation, it's not the only or even initial function. At the outset, a raise is not about advancing you economically compared to the prior year, it's about maintaining parity. Not getting a raise isn't career stagnation, it's actively losing money. If throughout your career you only get a raise equivalent to that year's inflation rate, you've basically never gotten a raise at all.

I'm not realizing anything that isn't obvious. That said, it's been noted that the view that raises are earned based on merit while inflation is imposed is actually a pretty common one amongst American workers, so I wasn't entirely alone on it as an unreflective intuition. The mental uncoupling of wage growth from inflation, in turn, probably causes all manner of misshapen beliefs about the state of the economy and what constitutes reasonable wage growth -- particularly if one (rightly!) thinks that one's real, not just nominal, salary should increase as one gains experience and seniority.

1 comment:

Alex I. said...

I think that accounts for most of the reason people hatehatehatehate inflation-- they think if inflation were lower, their extra cash would be buying more, and not understanding that the extra cash is compensating them for higher prices. While also not realizing that, if they're a net debtor, inflation is helping them (because the size of their mortgage isn't increasing with inflation).

It might be most useful to point out in the context of the 1970s inflation, which was driven in large part by union contracts with automatic COL increases-- when oil shocks raised the price of everything, that also raised wages, which in turn raised other prices because people had more money to spend, but more goods and services weren't being produced, and on and on.