ERI Economic Research Institute
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2007 Salary Planning and Inflation

REDMOND, WA - 10/26/2005 12:00:00 AM - 

Assessor Series subscribers who have read ERI's 2006 Salary Increase Survey Report know that ERI is very positive about the current US economic outlook (after all, 2006 is an Election Year). (Note: Assessor Series subscribers can access this report for free by clicking on the Salary Increase Survey tab at the top of their Platform Library.) We are, however, unnerved by 2007. ERI's Subscriber Services Call Center (open 24 hours each weekday) is noting a flurry of calls from those engaged in far-reaching salary policy planning.

What does an employee do who finds his/her lifestyle requires more money?

The tough alternatives are: moonlighting, robbing a bank (we're joking), unionizing (still joking), borrowing from savings, going into credit card debt, fighting for a promotion, or searching for a better-paying job. The easy alternative is asking for a raise. Our subscribers are reporting an ever-increasing number of employees asking for more money. The most often stated reason for these requests is the rise in cost of living, even though we continue to read with amazement US government reports that inflation is moderate (5.1% annualized as of September 2005).

In reality, employees are seeing increased costs. Consider this, if an employee drives 15,000 miles per year in a car that gets 15 miles per gallon, and the cost of gasoline has gone up (on average) $1 per gallon, then driving now costs $1,000 more than it did a year ago. In addition, the US Fed's key interest rate has risen a dozen times since June 2004 (and that was the first increase in four years). Coastal housing prices are still headed toward outer space (along with rents), and winter is here (with heating bills doubling for approximately half of the populace, which uses natural gas). Health benefit costs continue to rise at double-digit rates. And at some point, fuel prices have to affect the price of services and consumables. If the average American earns $35,000 and has take-home pay (after taxes of all types) of $1,800/month, how are these increased costs to be covered? With $100/month here and $100/month there, it subtracts down.

And the US government still must find the funds to pay for $200 billion in Iraq, $200 billion for Katrina and Rita, $500 billion for pharmaceuticals for those on Medicare, and extra money for its own fuel bills and interest payments. Can tax increases be far away?

For American taxpayers, 2007 could be known as the "Year of the Fight to Stay Even." And because of the change in US bankruptcy laws (effective October 17, 2005), those Americans living lifestyles above their earnings will have no escape. Use of credit cards will soon surely be curtailed.

All this means 2006 will be a good time to get your organization's salary policy in line. Do you pay competitively at levels reflecting the demand and supply of labor? If so, see ERI's Salary Assessor and Geographic Assessor competitive salary databases. Or do you place social concern for your employees above profits, and respond to the demand and supply of goods and services? In that case, see ERI's Relocation Assessor software, which provides detailed cost-of-living data for more than 10,000 locations. (For the Relocation Assessor software, ERI recently changed its housing calculations to take a larger percentage of earnings at $24,000, $72,000, etc., with the offset being decreased savings and consumables consumption.) Americans are already adjusting their spending patterns.

The latter part of 2006 promises to put great strains on salary decision-making processes. Late 2005 and early 2006 will be good times to put your salary administration house in order. Beginning an inflationary era on sound footing could pay long-term dividends.

(The above should not be read negatively. If a recession occurs in 2006/2007, it should be mild. America is starting from a solid base of low interest rates and low unemployment with a well-structured financial system. Past economic downturns have occurred on far more fragile economic foundations.)