October 13, 2010Inflationby EconomyWatch

Inflation Adjusted Wages

Inflation, as indicated by the CPI or the consumer price index, is the main reason, why economies around the world have to re orient themselves to adjust to the rate of inflation in an optimum manner. Inflation impacts various segments of the economy. It also affects wages. Due to the following three factors, a sharp decline in the real wages has been observed in the labor market. There is a close relationship between inflation and wages. Inflation adjusted wages are the wages, which do not lose value even when there is inflation. It is a well known fact that with inflation, value of money decreases. But, in case of inflation adjusted wages, this does not happen. Inflation adjusted wages also known as middle class squeeze, has declined sharply in recent years.
Role of the unions:
A gap has been created between wages and savings. This in turn is a threat to the productivity of the economy of a country. The labor union is instrumental in helping the workers avail their rights with regard to wages. The unions have played an important role in deciding the wages of the workers. They have worked towards granting equality to the workers.

The unions play the following roles:
  • They enhance industrial democracy, thereby increasing productivity.

  • Establish a close association between production and payments.

  • They also provide training to the workers.

  • Take care of health coverage pertaining to the workers.

  • Pension benefit issues are also taken care of by the unions.

In the year 1970, there was a gradual increase in inflation adjusted wages. However, it has maintained a very slow pace. People are putting in more number of working hours and not being paid to the optimum. This has created a squeeze pertaining to time as well as wages.

Factors affecting inflation and wages:
  • The most important factor is that high rate of unemployment has stretched over a long period and it is still in a phase of recovery. Although, employment is showing an upward trend, but some vacuum still remains in the labor market. As the number of workers far outnumber the actual requirement of the employers, under these circumstances, possibilities of increasing wages is low. Studies reveal that rate of unemployment was 5.6% in the year 2004. The trend was almost same in the year 2001. So, it indicates that this particular sector, is still recuperating.

  • The second factor, which affects inflation and wages is the creation of new jobs. This lowers the wage rate as compared to the wages offered by companies, which are older and grow steadily. This has also impacted the labor market.

  • The third factor is that, inflation has taken place faster lately. This also necessitates faster growth of the nominal wages. However, it has been the contrary.

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