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Wages and Inflation

Wage stagnation is a term that carries frustration and a dismal outlook. It’s true wages have been increasing, but not nearly at the rate most employees would hope. For several decades, wages have not kept up with the rising cost of living. While inflation and wages do impact each other, they don’t share a straightforward correlation. This means wages don’t necessarily increase when inflation rates increase. Inflation continually outpaces salary increases, which is a challenge for both employees and employers.

Employees struggle to make ends meet while employers struggle to retain their employees. The solution for both is financial education. Financial education helps employees navigate rising costs when wages aren’t rising equally. This then helps employers retain those employees who no longer need to leave their jobs to seek higher pay as a solution to their financial stress. 

What Drives Inflation and Wage Increases

It’s natural to expect inflation and wage increases to operate in sync. As prices go up, wages should go up. But different factors drive these two issues. Simplified, supply and demand of goods drive inflation, while supply and demand of labor drive wages. Forbes explains, “Inflation is defined by changes in the cost of a market basket of goods (such as housing, groceries, and fuel). Pay, on the other hand, is driven by changes to supply/demand for labor which can be caused by demographic trends, labor participation rates, unemployment levels, technological advances, and growth in productivity.”

Additionally, inflation fluctuates while wage increases tend to stay long term. This means if employers were to increase wages, they would not be able to decrease them even if inflation rates decreased. The result is that employers are slow to increase wages before they can determine how the market will be affected long term.

Although they are driven by different factors, inflation and wage increases are linked in some ways. They impact each other most obviously in what is known as the wage-price spiral. When prices of goods go up, employees need higher wages to afford higher prices, which means businesses must increase prices to afford higher wages.

Financial Strain on Employees

Because inflation tends to outpace wage increases, especially with the high inflation rates of late, employees are struggling to make ends meet. Metlife says, “More than 90% of employees say they are worried about inflationary pressures and rising costs.” 

More and more employees are living paycheck to paycheck, meaning they run out of money before each payday. PWC reports, “Employees are increasingly feeling the impacts of inflation. 44% of full-time employees report that inflation has had a major or severe impact on their financial situation over the past year. In a notable trend over the past few years, we find that the number of full-time employees who report that their compensation isn’t keeping up with the rising cost of living expenses has risen to 59%.”

Additionally, this report includes statistics that show employees are struggling to meet basic expenses.

  • 49% find it difficult to meet household expenses on time each month.
  • 44% of employees carrying credit card balances say they struggle to make minimum payments on time each month.
  • 28% of full-time employees often or always run out of money between paychecks.
  • 15% of employees who earn $100,000 or more per year always or often run out of money between paychecks. 

The last statistic in particular shows a need for something more than just wage increases. For most companies, it’s not feasible to increase every employee’s pay above $100,000. Even then, those high-earners are still struggling to make ends meet. Instead of, or in addition to, pay increases, these employees need financial education. Financial education teaches employees how to use their pay to their advantage. It teaches them how to budget and be disciplined in spending. Employees learn how to take advantage of debt instead of being overwhelmed by it. They learn how to improve their credit scores for lower interest rates. They can also learn the most effective ways to cut costs for their lifestyle. Not all budgets, lifestyles, and incomes look the same. Personalized financial education can help each individual employee live his or her best financial life.

Challenges for Employers

Employees are not the only ones feeling the strain of inflation. The pressure is on for employers as well. Inflation increases the cost of material goods, but it also increases the cost of benefits. This means employers must pay more to keep their employees, while still feeling the pressure of paying higher wages.

Not only do businesses have to manage their own costs and maintain competitive wages, but they also face the costly threat of high turnover. PWC states, “Financially stressed employees are also more likely to leave…They are also twice as likely to be looking for a new job. And 73% of financially stressed employees say they would be attracted to another employer that cares more about their financial well-being.” Similarly, Pew Research reports employees in a poor financial situation are twice as likely as those in a good financial situation to consider changing jobs.

One of the top reasons employees quit their jobs in the past year was low pay. According to Pew Research, the majority of workers who changed jobs post-pandemic received higher pay in their new positions. This suggests employers are not only struggling to maintain their employees, but they have to pay more to replace them.

A solution for both employees and employers is financial education. Providing financial education as an employee benefit is a low cost way to make a big difference in employees’ financial lives. PWC recommends to employers, “Implement financial wellness benefits that focus on the immediate money management concerns employees are facing. Employees can’t focus on longer-term goals or become financially resilient when their day-to-day personal finances are in chaos.” By reducing the financial stress in employees’ lives, financial education increases employee retention rates and helps to alleviate the pressure of granting raises in line with inflation.

Conclusion

When the cost of living is continually increasing, but wages are slow to keep up, employees feel like they are losing money. They are constantly fighting to maintain their standard of living. This leads to high turnover as employees seek new jobs with higher pay, which then puts a strain on employers. But employers who implement financial education programs help reduce financial stress among their employees. This decreases the pressure for those employers to give unreasonable pay raises. And with inflation continually outpacing wage increases, financial education is the only way to make the most of every dollar earned.

Find out how 101 Financial’s Workplace Wellness program helps employees manage the rising cost of living and take advantage of their wages.

Sources: PWC, CNBC 1 2, Forbes, Pew Research, Metlife