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Is Wage Growth Driving Inflation?

September 9, 2022

By Anthony Kaylin, courtesy of SBAM Approved Partner ASE

As the great resignation continues and employees who leave get generally 6% growth in salary than those who stay, a lot of people have argued that wage growth is the key driver of inflation.  However, not yet as many economists say the same. 

With inflation at 8.5% in July, a 6% growth in wages by leaving the employer is less than the inflation rate – leaving the employees, regardless where they sit, in a losing race with real income. Supply chain issues, although thought by the feds to be temporary, are leading to fewer goods in the marketplace which are desired by many who have the cash to pay for them.  This is the driver of inflation, especially gas and food. It is simple supply and demand. 

However, what makes the news confusing is that the Federal Reserve bases their interest rate decisions on the current employment situation, not on employee salaries.  With an unemployment rate of 3.5% and dropping for many of the individual demographics, youth labor has increased for example, the Federal Reserve concern of full employment and thus the fight for talent leading to higher wages and greater shortages of products because of the shortfall of labor is leading it to slow down the economy.  Higher interest rates make the cost of borrowing more expensive thereby slowing economic growth.

Over the past couple of years, nominal wages have been rising.  Although compensation packages have grown, that was due to healthcare costs for many years seeing double digit growth.  Wages were actually losing, and at times, less than comparable to 1980 wages.  With the pandemic, healthcare costs slowed and stabilized leading to real wage growth.   Yet, it is presumed that healthcare costs will be the prime mover again of compensation in the future. Many pundits believe that the new Inflation Reduction Law may force a shift of higher prescription prices onto employers as Medicare is seemingly capped.

Worker shortage is real and is a key driver of employer costs.  Minimum wage, although set by states, local jurisdictions, and/or federal government has risen dramatically for smaller businesses having to compete with the Amazon impact.  Drive down the street and hiring at McDonalds is at $15 to $16 per hour, while Kroger has risen to around $18 an hour. The is a case where the market reacts faster the government – even in Michigan where the current legal minimum wage rate is growing to $15 per hour. 

Yet, even higher real wages are not bringing enough workers back.  The retirees are coming back in small part, but not enough to make a difference. Unemployment for the various demographics has dropped, and employers are reviewing qualifications for jobs after the Great Recession’s qualification ballooning (e.g. administrative assistant needing a four year degree).  Automation, though, is being considered and adopted where possible by many businesses.

The labor participation rate of 62.1% is still below the pre-pandemic rate of 63.4%, and women (at 57%) are not returning to the workforce.

Therefore, HR has to be creative in this talent crunch.  They need to stop thinking about employees as a whole and think about employees by demographic groups.  With title inflation being attacked, now is a time to use DEI to build pipelines and offer those in the various demographics benefits that would meet their needs.  Wages are not driving inflation right now, but if the worker shortage continues, it will. Workers are losing in the real wage front compared to inflation, and a move may be necessary simply to maintain their current standard of living.

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