Wages and Inflation: Maintaining Fair Wages in a Changing Market

By Ben Crosby

A precarious relationship 

As most pundits are talking about our country’s current inflation’s effect on the cost of goods and housing, it’s important to consider the impact it tends to have on wages.

While the average national inflation rate is currently hovering around 9.1%, personal inflation can be anywhere from 5-14%, depending on the cost of living in a particular location and personal factors. It is estimated that inflation will continue to rise through 2023 with the cost of living also fluctuating. However, most nonprofits are targeting a 4% average wage increase in 2022, well below the current rate of inflation.

Some nonprofit leaders believe that instituting modest wage increases allows them to maintain their reserves and hedge against future layoffs or economic downturns. However, this strategy can cause longer-term consequences for organizations when current and potential employees seek higher-paid roles to accommodate their own rising expenses. While many organizations may not be able to afford “10% raises” for all staff this year (in line with current inflation rates), it is important to carefully consider the ways in which current inflation may impact certain groups of staff at your organization more than others. 

Inflation affects lower-end earners at an increased rate

Studies have found that those who earn less than $20,000 a year endure inflation at a rate of 0.6% more than those with an annual salary of more than $100,000. In essence, these lower-income families experience inflation at a degree one-third higher than higher-earning households. 

Part of the reason this happens is the way that lower earners’ spending patterns differ from higher earners. For instance, those that are on the lower end of earners aren’t able to save as much and wind up having to pay a higher proportion of their wages on day-to-day necessities. When cost-of-living increases, lower-income earners can’t cut back on “luxuries” that they weren’t spending on in the first place. Ultimately, staff earning lower salaries at your organization are the ones who will likely feel the negative impacts of inflation most acutely, often in the form of housing, food, or transportation insecurity. 

Navigating inflation to benefit your organization AND your employees

This year, many employers are trying to conserve funds in other areas so they can afford to increase salaries and remain competitive. Below we outline a few potential strategies to consider as you plan for wage increases in the coming year. 

Strategy #1: Match (or exceed) typical wage increases: 

For 2022, it is forecasted that most nonprofit employers are planning to increase wages by around 4%, with similar increases planned for 2023. While these increases do not match US inflation rates, they are notably higher than historical averages from the last 10 years. If at all possible, we encourage organizations to try to match these 4% average increases for the next couple of years. 

Strategy #2: Balance being competitive for top talent with internal equity for your current staff: 

In an effort to bring in new talent, you may be compelled to raise your starting salaries for new hires. It is important, however, to avoid pay compression, which can occur if companies pay new employees or newly promoted employees more than their counterparts or more tenured staff members. This tends to happen especially when there is an increase in the market for starting salaries. When organizations increase wages, pay compression can create pinch points and become a huge issue for employee retention and satisfaction. Any increase in wages should be contemplated only if an organization has determined that such an increase can be distributed in an equitable way that benefits all employees, not just new or higher-ranking staff members. Additionally, we believe a huge priority for all businesses should be to avoid future layoffs. Any time the future is at all uncertain, layoffs are a possibility, and raising wages too significantly can decrease a company’s reserves and make layoffs more likely.

Strategy #3: Implement a “flat” increase for all staff

Some organizations we have worked with recently have implemented a “flat dollar amount” increase for all staff. For example, all staff may receive a $3,000 increase in 2022, regardless of their current salary. This approach has a few advantages in that A) it is simple to communicate, and B) it differentially benefits lower-earning staff more than higher-earning staff. While we don’t recommend this as a long-term salary increase strategy, it may be effective as a short-term “adjustment” to staff salaries to try to get you over the hump of this high-inflationary period. 

Strategy #4: Focus on “living wage” instead of chasing annual increases

Instead of depending only on the market to dictate salary ranges, it could be beneficial to institute a “living wage” policy.  A living wage policy takes the uncertainty of the job market out of the equation and ensures all employees have enough funds to live reasonably well. Research shows that organizations that institute a living wage policy have found employee productivity has increased, turnover has decreased and there is little change to their bottom line.

What a living wage means for your organization varies and depends on a number of factors. Determining a living wage typically requires understanding the cost of living for the area in which you are based. One size does not fit all. This can be especially tricky if your organization is remote or has employees based in different parts of the country. In these cases, some employers decide to implement a standard living wage across the board based on the city that is the most expensive for their employees.

It’s also important to consider your organization’s values and goals, which will impact what constitutes a living wage for an individual organization. A structure based on providing a Living Wage will still include pay increases, but it maintains a promise to employees to keep their wages in line with what is necessary for their lives. By definition, this means that employers will need to keep an eye on living wage metrics and economic conditions in their area and make ongoing adjustments to their compensation structure as needed. 

Where to focus: staff satisfaction, inflation, and wages

Ultimately, wages don’t need to match or keep up with inflation exactly. Salary increases of 4-5% are currently the norm (depending on your industry) and should be sufficient in many cases. However, it’s important to investigate other ways that your organization can ensure that employees aren’t struggling to make ends meet. Strategies like implementing a living wage that corresponds to your region’s cost of living can go a long way to ensuring that your staff is thriving, not just surviving.