Published Jul. 16, 2022

This is a basic labour economic principle that says salaries and wages do not keep pace with economic changes.

In a high inflationary period, it means that salaries and wages do not decrease or increase with rising prices.

Why do salaries and wages not keep up with inflation?

There are a few explanations why wages remain unchanged.

First, your employment contract does not state any decrease in salary if the economy falls into a recession but most likely you will receive a raise in return for your contribution to productivity and profit.

The second explanation for why your pay does not keep up with inflation is Psychological and Moral.

Once companies raise your salary it will be detrimental to you morally and psychologically to bring it down.

Companies will not do any pay cuts because of the psychological and moral repercussions to employees at the expense of productivity.

Unlike goods and services where you can buy small amounts if the price increases or take substitute items, you cannot do that with people.

The third reason why your pay does not keep up with inflation is the law.

Salaries and wages are bound by law or statutory contracts. There is a legal minimum wage contract that companies comply with so they cannot just decrease your salaries and wages arbitrarily.

Now, in the short-term salaries and wages may tend to be fixed but can be flexible and negotiable in the long term.

The fourth reason is trade unions. What is their role in this situation?

Trade unions will not accept a decrease but will most likely propose a wage increase.

Therefore, the major reason why salaries and wages do not keep up with inflation is a management decision and prerogative.

Their decision depends on the sector, size and whether they are private or a public company.

Management has the last say in whether they will raise their salary, return their profit to shareholders in the form of dividends or the management may opt to use their funds for CSR projects.

Frankly, why can’t the management make their people their major CSR project by investing in their number one asset!

Well and good if they do plus still invest in their communities.

So, the reason why your pay does not increase as fast as inflation is less about the economy but more about the management.

However, if the government keep rising prices for too long without any effective measures to arrest rising prices, employees will demand an increase in salaries and wages.

How can we navigate this high inflationary period?

In Part 3 we will discuss how to combat the rising prices.

Thank you for listening.

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See you in Part 3.

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