You might have heard that nowadays workers want flexibility or jobs with a sense of purpose. But with inflation on the rise, something far more basic is getting attention: Cost of living labor adjustments (COLAs), or raises that keep up with actual inflation.
Why it matters: Though wages have risen substantially over the past year, on average they’re not keeping pace with inflation. Whether that’s a good or a bad thing kind of depends on where you sit in the worker food chain, and on your economic outlook.
- Unions – and other workers – are increasingly looking for the cost of living raises and protections.
- Once common in contracts back in the inflation-soaked 1970s, these provisions lost favor as labor’s power diminished and inflation ceased to be as much of a concern, while rising healthcare costs gained attention, says Todd Vachon, a professor of labor studies at Rutgers University .
Now: “There is increased interest in getting COLA provisions back in many contracts,” Ray Curry, the president of the United Auto Workers, which represents nearly 400,000 workers, tells Axios.
- Case in point: At the end of 2021, John Deere UAW members signed a 6-year agreement that locked in such adjustments.
State of play: Inflation over the last year is 8.6%, according to the Consumer Price Index. Wage growth was 6.1%, according to the Atlanta Fed’s wage tracker – a closely followed data source. For workers with a college degree, it was 5.4%.
- Meanwhile, real (inflation-adjusted) average hourly earnings in May 2022 were $ 31.95, 19 cents less than in February 2020 before the pandemic when they were $ 32.14, according to the BLS (h / t Axios chief financial correspondent Felix Salmon for doing the calculations).
Employers seem to be benefiting. Management can raise prices to keep up with inflation, and beyond, at the same time paying workers less in real terms.
- In other words: Employers are effectively cutting wages without cutting wages.
Zoom out: A few months ago, economists and policymakers were freaking out over the possibility of a wage-price spiral, in which rising wages drive prices higher, a vicious cycle that sends inflation out of control.
- As Treasury Secretary Janet Yellen said in December: “What we don’t want to have develop is a wage-price spiral, in which inflation becomes its own self-reinforcing kind of phenomenon that would become chronic in the US economy – something endemic. “
- That hasn’t happened, in part because of the diminished power of unions – and also, partly, because of the fast-changing nature of the economy. Just a month ago, economists were (wrongly) saying inflation peaked, notes Nela Richardson, chief economist at payroll firm ADP.
- “Things have changed dramatically. And it’s left employers scrambling to make up the difference,” she says.
Instead of a spiral, wages are playing catchup to rising prices.
- “Wage growth is responding to what’s already happened to inflation and productivity. This isn’t the beginning of a wage-price spiral,” Jean Boivin, head of the BlackRock Investment Institute, tells Axios.
And some non-union companies are giving COLAs a whirl. Back in February, all non-executive employees at Crunchbase learned they’d get a 7% raise, around the inflation rate at the time, purely to keep pace with price increases.
- This was outside of their regular review and promotion cycle, says Matt Schulman, a communications manager at the company. He got another raise soon after. “It was pretty awesome.”
The bottom line: “Wage growth is an element of inflation, but it’s not one of the key drivers right now,” says ADP’s Richardson.