Why Salary Increases *Still* Do Not Align With Inflation (2024)

FAQs

Why do salary increases not keep pace with inflation? ›

Inflation is about the rising cost of things like housing and groceries. Pay increases may depend on the balance between the number of people looking for work and the available jobs—typically related to supply and demand for labor.

Ideally, every year your company should provide better compensation to combat inflation. If you don't offer a yearly increase, employees may consider leaving because they will feel undervalued. If another company provides similar positions that keep up with inflation, those positions will be worth more.

In this case, you can use the current inflation rate as a base for your request, then ask for a little additional money tied to your job performance. Even if you don't get the raise you want, experts suggest asking for other perks such as bonuses or flexible work arrangements that can help you save money.

As inflation increases, investment falls, and the capital stock declines decline over time. While consumption may decline as well, this has no direct bearing on capital accumulation. The declining capital stock reduces GDP and makes labor less productive. Therefore, labor demand declines and real wages fall.

Aligning with this trend, a survey by PayScale indicates that businesses are planning to uphold an average salary increase of 3.8% throughout 2024.

Different inputs drive the numbers. Pay is largely determined by the supply and demand for labor, which is influenced by local demographics and unemployment rates, whereas inflation is driven primarily by increased costs in daily living expenses like home, food, and automobile costs.

The national average raise percentage is 3% for employees who meet their goals and their employer's expectations. U.S. employers plan to give employees a raise of 3.5% for merit increases and 3.9% for total salary increases for non-unionized employees.

Indeed the eroding effect of inflation on real wages is felt even more acutely by those who have not had a pay rise for some time. Some workers will need a pay rise of more than 10 per cent just to keep treading water in terms of their purchasing power.

Similarly, a Mercer poll indicates companies' total salary budgets, which include money for all pay increases, such as raises and promotions, will be 3.8% in 2024, on average. That's down from the 4.1% paid out last year.

Normal raise: 2-3% Good raise: 4-7% Big raise: 8%+

How much is too much for a raise? ›

Aim for a 5% to 10% raise for a standard increase. If you're underpaid or have extra duties, 10% to 20% could be fair. Back it up with research on sites like Glassdoor and highlight your achievements. Pick the right time to ask, like after a big project win.

Wages currently do not necessarily increase with inflation. The Federal minimum wage is not pegged to inflation, and companies have full discretion on whether to increase salaries above the minimum wage. Whether or not wages should increase with inflation is a philosophical question with deep economic impacts.

Adjusted for inflation, that would be $8.86 in 2009 and $12.85 today. Recent efforts to raise the federal minimum wage have stalled in Congress. Democrats made a push for a $15 base wage in 2021, but it was rejected in the Senate.

U.S. inflation rate versus wage growth 2020-2024

The rate of inflation exceeded the growth of wages for the first time in recent years in April 2021. In March 2024, inflation amounted to 3.5 percent, while wages grew by 4.7 percent.

If income is fixed income, or income that does not increase even when prices go up, the economic effects of inflation can be harmful.

Inflation is still outpacing wage growth for many groups

The answer, once again, comes down to the inflation rate. Of the workers surveyed who did get a raise, only 33% said their income kept up with, or exceeded, increases in their household expenses due to inflation, according to that survey.

Even before the 2009 pay bump, the federal minimum wage was failing to keep up with inflation. For example, it was set at $2 in 1974. Adjusted for inflation, that would be $8.86 in 2009 and $12.85 today. Recent efforts to raise the federal minimum wage have stalled in Congress.

Two of the largest sectors in terms of employment have shown growth in wages even after adjusting for inflation: leisure and hospitality (up 6.5%) and trade, transportation, and utilities (4%). However, the average wages in these two sectors remain lower than wages in the other sectors shown here.