Shouldn't inflation adjustments be a flat amount?

The Sandbox General
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This is a drunk post.

But I think the loudest in these moments!

I propose that merit raises/inflation adjustment raises should be dollar based so the rich don’t get richer, since we (the rich) aren’t affected by the basket of goods as compared to the lower income peeps.

Amirite?

Make it make sense!

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I’m retired, so no personal relevance. A couple of counterarguments:

  1. To the extent that merit raises are designed to encourage workers to do a good job. a flat dollar increase is not as much incentive for a higher paid worker as for a low paid one.
  2. If an inflation adjustment is intended to maintain a standard of living, a percentage increase is a more accurate way to do it, even if the exact percentage to maintain a standard depends on what things the person is spending on. (To the extent the rich are saving more, you might not - in an ideal model - want to increase the amount they could save, but in fact the higher paid are likely also spending more. Spending a lower percentage, but spending more, so need a higher dollar increase to maintain lifestyle.)
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yeah, but what they spend on likely isn’t included in the basket of goods the CPI is based on, in fact, they likely are dumping money in stuff that are inflation resistant, so you’re helping them get richer! Off with your head!

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I need more money for sneakers because everyone is buying them now.

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The ideal inflation rate is of course 0.00%. That’s a discussion for another thread.

If inflation adjustments were a flat amount to all individuals (everyone gets $1000 regardless of job level), then I think John’s comment holds true. [Points made by SteveWhite about incentives to do a good job are valid, but ignored for this post.] You still have senior-level employees that receive bonus compensation as a flat amount, instead of the present where it’s mostly percentage-based. For some of them, the bonus/supplemental piece can be a significant part of the total compensation, perhaps even more than the base salary.

Example: Joe Schmoe making $40K who gets a $2.5K raise but no bonus got a 6.25% raise in terms of total salary+bonus compensation. John S. Doe making $400K with a 50% bonus gets a total 0.625% raise, but in dollar terms still gets a bigger raise. If inflation is 3%, Joe gets ahead while John falls behind - but John is much more likely to put more of his money into investments where he can make up the difference, while Joe is just trying to cover regular costs and probably isn’t putting anything away for retirement.

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Hey, typical sneakerhead, you should work at the local shoe store for the employee discount.

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I like having time off though. That would wreck my weekend. I already volunteer as a pastor at our church too.

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Luxury goods are in the basket, as I understand it.

Yachts and private jets and maids and nannies aren’t getting any cheaper. And while I’m not trying to elicit sympathy for the poor rich folks, the fact is that if your goal last year was to pay then enough to easily afford that stuff and you want them to still be able to afford that stuff this year (so they don’t take their talent to a competitor and/or you want to reward them for a job well done) then they’re going to be affected by inflation too.

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BTW, it almost sounds like you’re just trying to get around the disparity in wages by nipping around the edges. And that’s a different conversation altogether.

But if you think it’s justified that the 2021 salaries of A and B are $400,000 and $40,000 respectively, then I think it’s hard to justify giving them both a $1,000 raise.

You’re saying that A’s labor is 10x as valuable as B’s. If that was true in 2021 then it’s probably true in 2022 as well.

Where I think some of the problems occur is that in a year with 5% inflation many companies might feel inclined to give A a 10% raise and B a 3% raise. That exacerbates the wage gap.

So first: decide if A is really worth 10x B. If he really and truly is, then give them both 6-8% raises in a year with 5% inflation.

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I think it depends on the purpose of the raise. If it’s strictly inflation based, and assuming there is a budget for how much salaries can increase overall, giving less (%) to the more highly paid means there is more (%) to make a lot more people happy. The trick is to balance this so that you don’t make your highly paid, presumably more valuable to the organization, people mad enough to leave. The replacement may cost more and it will take a while to get them up to speed.

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Both the US and Canada in the late 1970’s mandated limits on annual pay increases as a means of combatting inflation. In Canada the dollar amount of a pay increase was limited to a flat $2,400. I suggest you look at the some of the post-mortems on these programs to see how well they worked! One result was that companies found clever ways to circumvent the limits for their executives.

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Origin of employer provided pensions and benefits, so it did a lot to create demand for actuaries…

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Eh, I think the origin of fringe benefits in the US at least was the WWII-era wage freeze.

This source indicates that by 1960 half the private sector had pensions. Presumably an even higher share of the public sector.

But sure, the 70s era wage freeze probably also resulted in employers seeking out even more ways to pay more without actually paying more.

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I missed the 70s reference, you’re right it was the WW2 wage restrictions that did it.

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Yes. A lot of creative benefits other than pensions and traditional benefits were introduced in Canada in the 1970’s to circumvent wage controls.