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Stay for Pay? Companies Offer Big Raises to Retain Workers

Recent record-high wage gains for workers who remain in their jobs are a factor contributing to inflation


Employers are giving existing employees more merit and other pay increases, to defend against poaching by rivals and avoid the drain of training new workers.


By Gabriel T. Rubin and Sarah Chaney Cambon, WSJ

Jan. 2, 2023 5:30 am ET


Workers who stay put in their jobs are getting their heftiest pay raises in decades, a factor putting pressure on inflation.


Wages for workers who stayed at their jobs were up 5.5% in November from a year earlier, averaged over 12 months, according to the Federal Reserve Bank of Atlanta. That was up from 3.7% annual growth in January 2022 and the highest increase in 25 years of record-keeping.


Faster wage growth is contributing to historically high inflation, as some companies pass along price increases to compensate for their increased labor costs. Prices rose at their fastest pace in 40 years earlier in 2022. Inflation has cooled in recent months but remains high. Federal Reserve officials are closely monitoring wage gains as they consider future interest-rate increases to slow the economy and bring down inflation.


Employees who changed companies, job duties or occupations saw even greater wage gains of 7.7% in November from a year earlier. The prospect that employees might leave for bigger paychecks is a main reason companies are raising wages for existing employees.


Many workers aren’t feeling the pay gains, though. Wages for all private-sector workers declined by 1.9% over the 12 months that ended in November, after accounting for annual inflation of 7.1%, according to the Labor Department.


Workers in sectors such as leisure and hospitality can easily find job openings that might pay more, making it more enticing to switch jobs, said Layla O’Kane, senior economist at Lightcast.


“If I can see that the Burger King down the street is offering $22 an hour, and I’m making $20 an hour at the Dunkin’ Donuts that I work at, then I know very clearly what my opportunity cost is,” she said. “Employers are reacting to that and saying, ‘Well, we’re going to increase wages internally because we don’t want to lose the staff that we’ve already trained.’”


Employee bargaining power has increased as the economy rebounded from the pandemic, likely emboldening some employees to ask for wage increases from their current employers, Ms. O’Kane added.


Alexandria Carter, a billing specialist and accountant at an insurance company in Baltimore, received a promotion and a small pay bump earlier in 2022. After her year-end performance review, she received another 7% pay increase to reward her for her progress, and her bosses told her about their plans for her to keep moving up in the company.


That was a contrast with some previous jobs she has held, where praise and pay raises were less forthcoming.


“They were telling me that I’m excelling in my position, and I just got it,” she said. “To have that recognition and that they notice the work I’ve put in and to be rewarded, it’s just nice.”


There are signs wage gains are beginning to ease as the tight labor market loosens a bit. Average hourly earnings were up 5.1% in November from a year earlier, slowing from a recent peak of 5.6% in March. Many analysts expect wage growth could cool further in coming months.


In industries with high demand for workers, “companies are prepared for wage growth to match inflation,” said Paul McDonald, senior executive director at Robert Half, a professional staffing company. “As inflation comes down, it will be more in line with what wage growth has been.”


The consumer-price index, a measurement of what consumers pay for goods and services, climbed 7.1% in November from a year earlier, down from 7.7% in October. The pace built on a trend of moderating price increases since June’s 9.1% peak.


Still, wage pressures will likely continue in a competitive job market where poaching remains common. More than half of professionals feel underpaid, and four in 10 workers would leave their jobs for a 10% raise elsewhere, according to a Robert Half survey released in September.


Famous Toastery, a Charlotte, N.C.-based breakfast, brunch and lunch chain, is raising pay faster than ever before, said Mike Sebazco, the company’s president. Across the eight company-owned locations, wages for existing kitchen staff members are up about 15% from a year earlier.


“We didn’t want to be as easy to poach,” he said. It isn’t uncommon for managers from other companies to come to Famous Toastery’s dumpster pads to tell the breakfast chain’s workers, “‘Hey, come work for me, and I’ll give you an extra $2 an hour,’” Mr. Sebazco said.


To help cover higher labor costs, Famous Toastery raised menu prices in August for items such as the Western omelet composed of ham, roasted peppers, caramelized onions and American cheese.


“Bacon and eggs and a lot of produce items will go up and down, and you can weather that,” Mr. Sebazco said. “We’ve never really experienced labor increases such as this.”


Many businesses in the Boston Fed district cited labor costs as a bigger source of inflationary pressure for 2023 than other types of expenses, according to the central bank’s collection of business anecdotes known as the Beige Book.


Most business executives remain confident that they can pass along wage increases to consumers in the form of higher prices, said Lauren Mason, senior principal at consulting firm Mercer LLC. “This makes compensation investments somewhat easier to absorb,” she said.


Wage and price increases can feed off each other. In fact, higher inflation is pushing some workers to seek cost-of-living increases, helping contribute to wage growth among job stayers, economists say.


More broadly, pay is rising for both job stayers and switchers because companies can’t find enough workers. Across the economy, job openings—at 10.3 million in October—far exceeded the 6.1 million unemployed Americans looking for work that month.


Companies are using merit-pay increases to hold on to employees and minimize the potential productivity drain of recruiting and training new hires. Firms are budgeting more for merit-pay increases in 2023 than they have in 15 years, according to a Mercer survey of more than 1,000 companies.


Daniel Powers, a recent college graduate, received a 10% year-end raise at a management consulting firm in Chicago, after starting out with a six-figure salary when he was hired in September.


“They understand the realities of the market—there’s no false illusion of, ‘we’re family here,’” Mr. Powers said of his firm’s management.


Write to Gabriel T. Rubin at gabriel.rubin@wsj.com and Sarah Chaney Cambon at sarah.chaney@wsj.com



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