The authors hear a lot from executives that they are currently having to stomach massive pay increases for lower-level workers. But the data doesn’t support that. U.S. Bureau of Labor Statistics tracks wages and salaries for production and non-supervisory workers. The inflation-adjusted wages of these production workers has increased by a little under 9% since 1970, while the equivalent increase for all employees in the private sector has been 76%. History lessons aside, nominal wages increased by 5.8% in October of this year. However, inflation for the same month was 6.2% and is now trending toward 6.8%, the highest in 39 years. This is why the BLS estimates hourly wages for production and non-supervisory workers fell by nearly 1% in October. In other words, regardless of the current narrative, the sky is not falling. Yes, wages of production workers are up. But prices are up even more. So, if your margins are shrinking, it’s more likely that you have a pricing problem rather than a wage problem.
“We are paying the guy cutting up fruit $19 an hour,” complained the CFO of a major agricultural producer I recently spoke with. Almost on a daily basis I speak with an executive who tells me how one of their team members received a tremendous pay increase to jump ship. The problem with such stories is that everyone likes to talk about that one example that catches everyone else’s attention. And if all you hear is such stories for a while, you end up believing that such wage increases are the norm, not the exception.
This can lead to what the Nobel laureate Robert Shiller calls narrative economics. Simply put, Shiller describes how a strong narrative, true or false, can catch on like wildfire and compel most people to ignore fundamental facts when making economic decisions. The power of the narrative can be so strong that it can compel people to hold on to a seemingly illogical beliefs for years — think the housing bubble or the dot-com boom.
So while the current narrative I am hearing from a number of executives is that the current war for talent has resulted in wages to be “out of control,” I’m skeptical that this received wisdom is even accurate.
What does the data say?
U.S. Bureau of Labor Statistics tracks wages and salaries for production and non-supervisory workers, which account for about four-fifths of the total employment on private, non-farm payrolls and include employees in manufacturing, mining, construction, and service-providing industries in non-supervisory roles. The average production and non-supervisory worker earned $26.40 per hour in November of this year. Compare that to an average hourly wage of $3.30 in January 1970. That seems like quite an increase. But how much of that has gone to inflation vs. an increase in purchasing power?
The inflation adjusted wages of these production workers has increased by a little under 9% since 1970, while the equivalent increase for all employees in the private sector has been 76%.
History lessons aside, nominal wages increased by 5.8% in October of this year. However, inflation for the same month was 6.2% and is now trending toward 6.8%, the highest in 39 years. This is why the BLS estimates hourly wages for production and non-supervisory fell by nearly 1% in October.
In other words, regardless of the current narrative, the sky is not falling. Yes, wages of production workers are up. But prices are up even more. So, if your margins are shrinking, it’s more likely that you have a pricing problem rather than a wage problem.
What wage increases are HR leaders expecting?
A survey by Salary.com shows that the majority of firms are not planning to increase their salary budgets compared to changes in 2021. Surveys by The Conference Board and Grant Thornton show higher planned wage increases, but these increases are still below the inflation numbers observed in 2021. It’s difficult to predict if these wage increases will make up for the cost of inflation in 2021 or 2022 as both wages and inflation predictions have been a moving target in the past few months.
However, one thing is certain: If the current inflation continues, a moderate wage increase is a recipe for frustration for both employers and employees. As the Great Resignation continues, employees are more likely to switch jobs if they receive a wage decrease when taking into account the cost of inflation.
How much should you pay?
In the end, wages are determined by demand and supply. Recent analysis by Ed Yardeni, the former Chief Investment Strategist of Deutsche Bank, shows that real wages have grown by 1.2% per year since the mid-90s. A 1.2% annual increase in real wages is quite different from the “crazy wage increases” some executives talk about.
Yes, those one-off examples of Joe and Jane who received massive pay hikes make for a cool story at a cocktail party — and can quickly form a narrative that is often repeated — but it’d be unwise to base your payroll strategy off anecdotal narratives rather than stats that allow you to see the bigger picture. My own analysis of wage increases in the past 50 years shows that these increases most often remained within 1 to 2% above inflation.
A 1 to 2% wage increase above inflation can be a good rule of thumb. However, movements in wages can vary widely between industries, professions, seniority levels, states, and even cities. In the end, only you can decide how much the right talent is worth to you. If the coffee shop across the street is losing $1,000 a day because of a vacant role and your coffee shop is losing three times that amount per vacant role, it’d be surprising if you wouldn’t be willing to pay a bit more than your closest competitor. So don’t obsess too much over what your competitors are doing. Instead, go back to questioning your basic assumptions and calculate how much the right talent is worth to you.