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When Inflation Weakens the Pay Rise: How Employers Can Respond

about 2 years ago by
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What to do when you can’t pay your employees enough to meet the rising cost of living

2020 brought a pandemic. 2021 brought the Great Resignation. Neither issue has disappeared, and the knock-on effects have delivered a new pressing issue for 2022: record-breaking wage increases devalued by record-breaking inflation. This development brings the risk of staff loss if workers quit to seek higher pay packets. For employers who cannot afford to raise wages, there are alternate strategies. Discover ways to retain your workers without crippling your business viability.

Record-breaking wage growth

The shifting sands of the labour market over recent years have put every Australian employer on edge. But as businesses recover from disruptions like pay freezes and shortened hours, salaries have risen again.

Another post-pandemic outcome, Australia’s lowest jobless rate in more than a decade, has led to decent wages for the first time since 2007, as employers contend to keep workers.

Pay rises should be a reason for employees to celebrate. Instead, workers are finding themselves worse off than in previous years because of inflation. ​

Record-breaking inflation

Simply put, inflation is how much prices on goods and services have risen. While last year’s December quarter showed wage growth had climbed to a high of 2.3%, inflation had climbed even higher to 3.5%. The March 2022 inflation figure rose even further to 5%. The bottom line: inflation is eating up the benefits of higher wages and it’s expected to keep rising to about 6%. That’s bad news for the boss.

How inflation and wages intersect

Employers will be feeling the pressure to raise pay even higher than it is already, to keep employees happy. More to the point: to keep employees.

It’s not as bad as in the US where inflation has climbed to a whopping 7.5%, but hardworking Australians still feel a very real pinch. The instinctive response is to look to employers for better compensation—at least to match inflation.

Unions, particularly in health and rail industries, are active in demanding wages that meet the cost of living. This is challenging in a state like New South Wales, which has a 2.5% cap on annual increases.

The impact on employees

According to theAll America Economic Survey,inflation is eclipsing COVID as the main concern among the public. Although workers are getting paid more, their money is worth less. For example, a worker who could purchase a new car in 2020 might no longer afford it in 2022, despite a higher salary.

The biggest cost increases have been for petrol, housing and university education, but the squeeze is keenly felt in grocery bills and household equipment too. For some workers, particularly those in low-paid jobs, it’s led to concern about affording even the basics.

In addition to money not going as far as it used to, workers also might find that they are:

  • working harder at their job because of staff cuts

  • experiencing low job morale as people quit

  • facing health risks being at work

The impact on business

  • Businesses are feeling the burden of rising costs too.

  • The pandemic disrupted supply chains, causing increases in the cost of raw materials.

  • The rising price of energy and fuel caused by the ongoing Russian war on Ukraine is causing transportation costs to soar.

  • With salaries being a top priority for 40% of job seekers, workers are demanding higher wages than ever.

The question for businesses is, who will shoulder the burden of rising costs?

When employers can’t afford further pay rises

Higher pay elsewhere could be a reason for any employee to quit. Since many employers are anxious to retain their workers and attract new talent, pay rises have been a very real part of new annual budgets. The abovementioned US survey showed that 99% of companies surveyed intended on raising employee pay in 2022. In some cases, it has meant a second pay increase within 12 months, instead of only one.

While large corporations and private companies are best positioned to offer alluring pay packages, the public sector, small businesses and non-for-profits don’t always have that luxury. But businesses with less flexibility shouldn’t write off the idea of pay increases. Without wage increases, employers may be facing the alternate cost of recruitment.

Is there another way?

The reality is that an increase in wages or some alternate solution must be considered.

The cost of pay rises will cause a dent somewhere else in any given business. That could take a few different forms:

  • the business shrinks its profit margins to swallow rising costs

  • rising costs are passed to the customer by raising product and service prices

  • work hours are reduced

  • less staff are employed, adding to individual workloads

Pushing the cost to customers could drive inflation further, which in turn drives wages up, causing a wage-price spiral.

But there are other ways employers can respond to the dilemma.

1. Cutting costs

In an outline of strategic steps to help weather inflation, The Harvard Business Review identifies cost cutting as the first step. A detailed review of spending is the starting point.

Once it’s clear what spending brings the best returns on investment, companies should outline strategic and non-strategic spending, based on company goals. Knee-jerk spends in crisis times can be avoided by keeping every decision-maker on the same page. They should know exactly how their spending affects the Profit and Loss.

Once true costs are clear, a closer look at cost drivers is needed: reviewing of processes, space and equipment and comparing these to standard industry costs.

2. Increase Productivity

Government stimulus packages helped the Australian economy during the COVID crisis, keeping the average household in good shape. However, according to EY Oceania senior economist Johnathan McMenamin, overstimulating the economy brings the risk of generating more inflation without delivering improvements in people’s living standards.

“I would argue it’s probably time to reinvest in productivity-enhancing investments, or to save that [stimulus] money.”

Andrew McKellar, chief executive of the Australian Chamber of Commerce has a similar recommendation:

“In the upcoming annual wage review, any push for unsustainable wages growth would likely risk the viability of businesses and the jobs they sustain and create. It’s critical that increased productivity drives wages growth in 2022.”

Two potential steps towards higher productivity are:

1. elimination

2. automation

Employers should re-examine what work brings in the most value and eliminate what is unnecessary. An example is the new concept of opt-in housekeeping in the hotel industry.

Automated processes using intelligent document processing or robots can bring stability, and even better resilience for future disruptions. Cigna, a global health service, demonstrated this by adopting Zoey, an automated messaging concierge, which reduced contact centre costs and shifted appointment-booking traffic out of stores. If it’s the right digital approach, automation can boost revenue enough to offset wage increase.

3. It’s not all about pay

As the Great Resignation morphs into the Great Adjustment, employees have either settled in their new pursuits, returned to the places they left or are still looking.

The good news is that employees are not only after the highest pay.

“Employees are increasingly looking for a more personalised work experience – one that’s consistent with their personal values, provides greater flexibility and work-life balance, presents career development opportunities, and offers inspiring work. Organisations need to take this into account and ensure their benefits offering resonates with the needs and preferences of their people.”

- Chi Tran, Head of Market Insights and Data at Mercer’s workforce consulting practice

Companies that can’t afford to meet inflation with wages can leverage other aspects of working life in their offer to potential candidates.

4. One-off Bonuses

One way to provide workers with more money while avoiding the permanence of a wage increase, is to provide one-off payments. Bonuses include variable pay based on individual or company performance. They enable businesses to maintain conservative base salaries while still offering more to their employees. Google recently achieved this with a one-time cash bonus. These cash awards encourage employees to consider the full compensation picture before deciding to move on. They can be incentives for higher productivity too.

“Wages including bonuses are growing faster than the measure that excludes bonuses.”

- Sean Langcake, head of macroeconomic forecasting for BIS Oxford Economics

Looking ahead

Fortunately, inflation is expected to moderate over time. Nevertheless, employee bargaining power is unlikely to change soon. Employers that don’t plan pay rises in 2022 are likely to be left behind.

Inflation can drive wages up as workers demand more money to cover living costs. Employers, in turn, may drive up the costs of products and services, increasing inflation. This is the wage-price spiral.

Workplaces that successfully cut costs or increase their productivity can help drive inflation down as they absorb the rising cost of wages rather than passing them on to consumers.

Stay in tune with recruitment strategies that work

MTC Recruitment works hard to stay on the pulse of current recruitment trends and strategies.

If you have job vacancies to fill, contact us to discuss your recruitment options and find the talent you need.