Corporate America Is Facing a Compensation Conundrum


The highest inflation rates in 40 years and the response of central banks around the world to aggressively raise interest rates have created a double-edged sword for businesses and households.

On the other side of the blade you have less experienced employers who consider inflation when making compensation decisions. With interest rates rising rapidly and a recession on the cards, it may make sense to freeze wages and cut back on overtime and part-time hours. Such a policy can protect so-called core employees, or those who are full-time employees who have been with the company for a long time and are less likely to leave their job soon.

However, with inflation as high as it is, the lower wages equate to an 8% pay cut. It’s enough to cause cash flow problems for many households, especially those who can’t afford to take out a loan with consumer loan rates also rising rapidly. They will also not be able to waste time by putting in overtime because the flexible hours of workers are decreasing. Even worse, there is an amplifier effect. As companies turn to tactics like cutting wages and cutting overtime to protect core workers, there are fewer options for families to deal with cash flow shortages. and key workers are at greater risk of infertility destroying their incomes.

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On the other end of the spectrum, employers may well know that a big raise is necessary so that their core employees can keep up with the rising cost of daily necessities such as food and strength. To achieve this, employers may fire unemployed workers outside the core group. Doing so allows businesses to better protect the people they may still have when conditions begin to improve. However, the problem is that protecting primary workers against the ravages of inflation raises the cost per worker for businesses, which in turn contributes to growth. This situation leads to the dire realization of inflation expectations that the Federal Reserve fears most. It means that even for inflation to decrease slightly, it requires a significant increase in unemployment because the employed workers retain their purchasing power.

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Taken together, these two blades suggest that the Fed’s efforts to reduce inflation expectations by increasing interest rates will lead to a sharp and contagious rise in financial stability. for working families or a decrease in price expectations caused by businesses. However, the problems facing working-class families may be more severe than anyone imagines because the current level of inflation poses threats not seen since the mid-2000s. 1970, when the economy finally adjusted. expensive in nature. Back then, nearly half of the baby boomer generation were full-time working adults. The younger half of that generation and those that followed have not had the challenge of adjusting to sudden, unexpected and persistent inflation.

There is no clear-cut solution to bilateral energy problems. As the problems get worse, the risks of delay in solving them increase. In addition, the potential side effects associated with problem solving add up quickly. It is difficult to predict where and how the effects will balance. The Fed has opted for a faster rate hike, hoping to avoid the financial instability that followed former chairman Alan Greenspan between 2004 and 2006 due to new laws and regulations that created the bank. secure system.

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I support the Fed’s current path, and I have no doubt that those new safeguards have made the financial system more stable. However, I would not be surprised if policy makers find themselves with financial instability that no one has thought about, because they are the new threats posed by this new inflationary environment. , which is at risk of being magnified and contagion if the Fed tries too quickly to bring about inflation. return to its purpose.

More from Bloomberg Opinion:

• The World’s Central Bank May Have Arrived: Daniel Moss

• Fed Gives Americans a Lesson in Lag Time: Alison Schrager

• Fed Confronts Pain in Inflation War: Bill Dudley

This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.

Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president of federal policy at the Tax Foundation and associate professor of economics at the University of North Carolina.

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