Pressure for 'cost of living' wage increases grows, confront limited budgets

by Stephen Miller, June 2008
Society for Human Resource Management

Rising prices are building up U.S. employee expectations for wage increases that will at least maintain their purchasing power, predicts ERI Economic Research Institute (ERI), a provider of salary survey and compensation data. But those hopes may be running up against salary budgets constricted by the economic slowdown in 2008.

There's little doubt that commuters are reeling from gas prices of $4 per gallon, and the federal government's consumer price index (CPI) as of April 2008 is further fueling inflation fears. For instance, ERI reports that:

• Consumer prices rose at an annual rate of 4.2 percent from April 2007 to April 2008.

• Energy costs are up 15.9 percent over the past year.

• Food costs are on the rise; bread prices were 14 percent higher than 2007, milk up 13.5 percent.

"These numbers indicate some troubling economic trends," says David Thompson, ERI president. "When the CPI starts to show rapid increases each month, the expectations of salary increases at least equal to the 'cost of living' also grow. The recent CPI increases represent a significant change from the pattern in recent years, and the pressure will be on to grant salary increases based on these changes in CPI."

Inflation Meets Economic Slowdown

While employees might be feeling the pinch of increased costs and might feel entitled to an increase that keeps them at least even with the cost of living, employers must face the reality of setting pay levels based on the demand for labor and the goods and services that they produce.

According to ERI's 2009 Salary Increase Survey, employers are expecting to give increases for 2009 of around 4 percent, but what is received by any individual employee might be very different, based on what a person does and in what industry.

There are reasons why wage increases sometimes don't match the CPI. On the cost-of-labor side, "companies pay what they do because that's what the labor market for a specific skill requires," Thompson says. And in recent months, he points out, the labor market has weakened.

A report by executive outplacement firm Challenger, Gray & Christmas found that firing announcements increased in May 2008 to the highest level since December 2005. Similarly, the federal Bureau of Labor Statistics reported that the U.S. unemployment rate jumped to 5.5 percent in May 2008—the biggest monthly rise since 1986—as nervous employers cut 49,000 jobs, while the median duration of unemployment among those out of work in April 2008 increased to the highest it has been since June 2005.

Getting It Right

The consequences of wrong pay choices are serious, Thompson observes. If companies don't pay enough, they lose good people and can't hire new ones. If they pay too much, the prices of their products or services won't be competitive.

"Basing a salary increase on the increase in the cost of living just doesn't really work," he says. "Although such an across-the-board increase is easily understood and appears equitable, companies realize that increases must reflect the market for labor in their industries—or they won't be in business for very long."

Stephen Miller is manager of SHRM Online's Compensation & Benefits Focus Area.