Workers Want Wage Increases because of Inflation

Will increasing employee wages improve or worsen inflation?

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• Inflation and the increased price of everyday goods and services is becoming worrying, but it is unclear how long it will last.

• Last year, the average worker’s wages went up by 4.5%. Inflation – the highest it has been for forty years – is such that prices for goods and services are 7.9% higher than last year.

• No matter what employers decide, workers will suffer as long as there is inflation because wages typically do not keep up with price increases – especially for low-income workers.

Inflation and the increased price of everyday goods and services is becoming worrying, but it is unclear how long it will last. While it has had negligible effects on the overall economy, it has had severely negative consequences on the everyday lives of many ordinary workers.   

Inflation and the increased price of goods and services are worrying enough that it is a primary driver of workers desiring increased wages.   

According to a recent survey from Prodege, 8 out of 10 workers believe companies should substantially increase wages in response to inflation. In addition, according to a study from Grant Thorton LLP, 40% of workers expect pay increases of greater than 6% this year.  

Before inflation began, however, wages increased, but higher prices for goods and services in many cases make these wage increases negligible. So, in turn, workers are requesting even higher salaries from these initial increases. 

Last year, the average worker’s wages went up by 4.5%. Inflation – the highest it has been for forty years – is such that prices for goods and services are 7.9% higher than last year.   

How should employers respond to wage increase requests during inflation? 

Employers first and foremost need to respect the place many workers are coming from in making such requests. It is extraordinarily demoralizing when a substantial wage increase amounts to nothing shortly after that because of inflation.   

On top of being demoralizing, the struggle for many workers to make ends meet has worsened because of inflation. So the request for a wage boost is not unreasonable and, therefore, should not be treated as if it is.  

However, the more salient question for employers is how they ought to respond to worker requests for wage increases during inflation: should they increase wages, or will they keep wages the same? First, we should differentiate this from what employers will do for the most part: to keep wages the same.  

If employers continue to raise wages during inflation, this will require budget cuts elsewhere, potentially contributing to further increases in the prices of goods and services. However, because of this salient possibility, most employers will keep wages stable during the duration of inflation.  

Regarding what employers should do, economists generally differ in opinion – with some agreeing with the decision to keep wages stable, others advocating for wage increases, and even a tiny percentage believing in wage decreases.  

The idea behind increasing wages is that it allows more people to participate in the economy by purchasing things. In contrast, decreasing wages is to reduce the price of goods and services so people can afford them again.  

Thus, given this difference in opinion, it might be fair to suggest that what to do is something that employers must determine on a case-by-case basis with financial analysts. For example, with an expert, you will need to ask yourself: “will increasing, decreasing, or maintaining wages make things better or worse?” 

It isn’t easy to believe that the answer will be the same in every case, which is why economists probably cannot come to a consensus on the matter. Intuitively, however, decreasing wages seems like a primarily lousy idea that will only benefit employers – which is why in many cases, it is illegal. 

Nonetheless, luckily for workers, they should not expect their employers to decrease actual wages. Even during the worst pandemic, wages remained relatively stable, and wage growth occurred.  

Workers will suffer as long as there is inflation. 

No matter what employers decide, workers will suffer as long as there is inflation because wages typically do not keep up with price increases – especially for low-income workers.  

The fluctuating cost of living has minimal or devastating effects depending on your income bracket. In other words, depending on your income, your inflation experience will vary widely.  

High-wage workers hardly feel the effects of inflation, while low-income workers are now struggling to afford basic needs in many cases. This is one category that employers need to consider when shifting wages, as being blind to this can lead to devastating consequences.  

As long as there is inflation at the current level, prices will remain high for goods and services, while wages will remain stagnant for the most part.  

It is unclear what this means in the long term, but in the short term, this will mainly harm low-income households who experience the highest rates of inflation among all income brackets. The most vulnerable are now becoming even more susceptible.