Salaries and Inflation

Salaries and Inflation

Agora #89
Pages 10 - 12

This short paper does not pretend to be an academic paper. It is about some basic reflections of a union and staff representative concerning salaries and inflation.

Inflation, an “I word” and a scourge for many economists, bankers, and finance ministers, is often used as an alibi to contain and reduce salaries in real terms. While it is undeniable that high inflation may have a destabilizing impact on the economy, and ultimately on the job market, it is not generally proven that salary adjustments to inflation will automatically generate an inflationist spiral[1]. Moderate inflation, on the other hand, may be good for the economy[2], being a bulwark against the risk of deflation, an even worse devil. A smooth salary adjustment to inflation could be beneficial to keep economical and job market stability, as even if it does not always benefit financial profitability it can at least benefit social and political stability.

[1] G. Blakeley “The Wage-Price Spiral is a Myth”,, 21.06.2022

[2] S. Ross “When is Inflation Good for the Economy?”, 09.01.2023

It is “Salary Adjustment”, not “Salary Increase”!

In a world where communication is king, the choice of words is important. How many times do we hear “salary increase” instead of “salary adjustment” in the context of inflation? “Increase” and “adjustment” are not synonyms, “increase” implies “growth”, while “adjustment” indicates adaptation to something. The choice of the one or the other is not trivial. Unsurprisingly, employers have the tendency to say, “salary increase”. This triggers an epidermic reaction in the inattentive reader/listener, be it a shareholder, a manager, or the general public. Such a reaction is linked to the false perception that some special efforts are made by the employer, and that the employees get some undue benefits out of a situation (inflation) where the majority of the people tighten their belts. In the specific case of international organisations, many national politicians are keen to jump on the opportunity to get more popular votes by bashing international civil servants and their institutions – an extremely popular activity these days.

To say “salary increase” instead of “salary adjustment” in the context of inflation is misleading and etymologically a non-sense. As it is well known the term salary comes from the Latin “salarium”, an allowance legionaries received to buy a certain amount of salt. In a period of inflation, the amount of salt they were entitled to, remained the same. In other words, the “salarium” automatically adjusted to inflation (assuming of course that the price of salt followed the inflation’s basket). Ancient Romans were very pragmatic people! Two thousand years have elapsed since then, but inflation still exists and is there to remain in the future. Since the meaning of salary has evolved, it has lost its original salty connotation and has become a synonym of wage, which is an amount of money paid for a specific quantity of work. The terms nominal and real wage/salary have been coined. While saying “nominal salary/wage increase” is technically correct when speaking about adjustment to inflation, the expression is still misleading since its correctness is linked to the qualificative “nominal” which has the annoying tendency to disappear in summaries or newspapers articles. On the other hand, “real salary/wage” decreases most of the time, at least during a certain period, when there is an adjustment to inflation due to the delays inherent to the adjustment procedures. So, with a pinch of salt, next time your manager asks you to work more because your (nominal) salary has increased to adjust to inflation, tell them you will work less to adjust to the decrease of your (real) salary!

No to the mantra “Salary adjustment is bad for inflation”!

This mantra is so often repeated that it has permeated our collective subconsciousIt is easy to state and even easier to apply. No need to demonstrate it nor to check if it applies to the specific situation, it is a self-evident truth. Or is it? Well, some economists tend to disagree[1].

First of all, salary adjustments are always delayed compared to present inflation. The delay in general can amount from 6 months to one year, the inflation rate used to compute the adjustment being the consolidated inflation rate of the previous year (e.g., the weighted average of some countries inflation rate from July to June of the previous year in the EU method). Furthermore, in case of high inflation there are sometimes some mechanisms (e.g., the moderation clause) that further delay the adjustment. It would appear therefore that due to these delays, salary adjustments in general cannot be the drivers of inflation. They may however have an indirect and secondary effect on it on the long run.

Secondly the effects of salary adjustments on inflation and economy in general may be very different according to circumstances. If the main drivers of inflation are aggregate demand or excessive consumption, the impact of salary adjustments on inflation is obviously higher than if the main drivers are supply-side shortages, external factors (war), or pandemic-induced reasons as in the present inflationary surge. It is important to always make a detailed analysis of the roots of inflation, in order to be in measure of assessing the possible effects of salary adjustments on inflation. In some circumstances, like the present ones, proper salary adjustments may have a positive and stabilising effect on inflation and the economy.

[1] A. Alvarez et al. “Wage-price spirals: The historical evidence”, IMF Working Papers, 11 Nov 2022

The importance of a continuous and smooth adjustment of salaries

A good salary adjustment method should allow for a smooth and continuous adjustment of salaries. Erratic changes of the salaries, with long periods of no-adjustments followed by sudden adjustments may have the tendency to introduce instability in the economy and may generate surges of inflation. Furthermore, after an extended period of no-adjustments the due adjustments become quite huge, and it could be difficult to have them accepted and voted by the governing bodies of the organisations. We had a similar issue at the European Patent Office at the end of last year. For short term financial reasons, some managements try to delay the adjustments of salaries and try to promote salary adjustment procedures that produce delaying effect. It is up to the Staff representation and to the unions to stress the importance of a continuous and smooth adjustment of the salaries in the interest of the employees and the organisation alike. In cases of high inflation as it was the case in 2022 an intermediate adjustment will allow a smoother adjustment process.

In search of stability

Financial stability and limitation of inflation are surely important, but social, labour and political stability in our democracies is even more important. In some circumstances, proper salary adjustment may contribute to enhance stability.

The main scopes of our financial institutions, particularly that of the European Central Bank, is to keep prices stable and limit inflation below a certain threshold. It seems, however, that the approach is sometimes too strict and mechanical, with too much attention being given to the compliance of fixed arbitrary thresholds (e.g., the ECB 2% inflation rate). These arbitrary thresholds should be interpreted as indicative aims, based on empirical experience, to keep inflation at a moderate level. More flexibility should be allowed according to circumstances, particularly in special cases like in the past three years (COVID, war in Ukraine). Again, a proper and detailed evaluation of the reasons of the inflation should be made before (and instead of) blindly applying the old and known easy recipes, in particular blocking wages or unduly delaying salary adjustments. Other mechanisms may be available and be more appropriate to restore stability. A salary adjustment well suited for the circumstances may help avoiding recession or deflation tendencies after an (high) inflationary period.

Finally, as unions, we should care about the stability from the employee’s viewpoint. Stability is important for the staff wellbeing, and this will also benefit the organisation on the long term. Proper salary adjustments in times of inflation will guarantee that staff may continue to live as planned and avoid unexpected and stressful financial situations.

Solidarity with the employees having lower salaries

“Solidarity is our Cup of Tea” is one of the mottos of SUEPO and solidarity is certainly one of the core values of all unions.

When speaking about the adjustments of salary to inflation we should not forget that the impact of inflation is much worse for the employees and workers that have lower salaries. While inflation impacts everyone, the price increases in essential products disproportionally impacts staff with lower salaries. It is therefore important to support them and have appropriate mechanisms in that respect. A solution for staff with lower salaries could be to reduce the delay in time between inflation and their salary adjustment, or to have a number of intermediate adjustments during the year. If the inflation is not driven by the price increase of essential products, this proposed mechanism will only have secondary and marginal effects on inflation, if at all. Other mechanisms can also be envisaged. In any case, solidarity with employees having lower salaries in these circumstances is a moral duty that comes before financial considerations, except if the financial impact of it has a clear destabilising and deleterious effect on the economy, and ultimately on the staff itself.

Conclusion: a detailed and comprehensive approach

It is evident from all the above that a comprehensive approach should be followed, considering all pertinent aspects. First, a detailed analysis of the reasons for the inflation should be made, in order to identify the main drivers of it and act on them accordingly to curb the inflation. No mantras, no seemingly easy and one size fits all solutions. Secondly, salary adjustment procedures that are just, smooth, and continuous over time need to be devised to avoid erratic developments. Thirdly, keep stability in mind, and remember that it is not only restricted to economic/financial stability, but also includes social, labour, and political stability, not to forget the employees’ stability and wellbeing. Finally, do not forget solidarity, so dear to us, which is the backbone of human society.

The approach should be comprehensive not only in its methods but also in its means and actors. All stakeholders (States, EU, ECB, Organisations/companies, Staff representation, Unions) should have their say, contribute, and cooperate. Only so can a workable and satisfactory solution for all, particularly for the employees, be reached.

Roberto Righetti 

About the author

Membre du bureau fédéral de l’USF et membre et secrétaire de SUEPO TH