Eleven U.S. states currently conduct minimum wage adjustments annually to account for inflation and changes to the Consumer Price Index (CPI), according to the National Conference of State Legislatures. Several other states have pending legislation to adjust wages that go into effect over the next three years. For HR leaders that aren't yet affected by similar legislative measures, it may still be wise to consider CPI and inflation when calculating wages.

Research from the U.S. Department of Labor (DoL) found that a higher minimum wage can "sharply reduce" the cost of hiring, training and retention. This fact may influence the decision-making of the 27 U.S. states that mandate a higher minimum wage than the federal floor, as the DOL notes. While individuals earning an hourly rate less than or equivalent to the federal minimum represent less than four percent of the U.S. workforce, cost calculations should be considered on a broad basis by HR executives, per the U.S. Bureau of Labor Statistics.

Join us as we review why it may be valuable to consider inflation and the CPI when outlining your compensation strategy, and how to consider these factors.

If You're Not Subject to Minimum Wage Adjustments

Minimum-wage workers in states with inflation adjustments have clear expectations for annual raises. In some cases, these trends could have a "ripple" effect through parts of the workforce. While senior salaries may not grow accordingly, HR leaders in areas with a $15 minimum wage are encouraged to look toward mid-range pay to remain competitive.

If your organization operates exclusively outside these states, there are still lessons to be learned. Recent studies by UC Berkeley on New York's minimum wage, which is higher than the federal mandate, have revealed "large positive effects on living standards and very small effects on employment." Despite predictions that a higher minimum wage could lead to soaring costs for employers, this UC Berkeley study found that higher payroll costs were offset by improved productivity and retention, and the impact on consumer pricing was "equivalent to about a nickel for a $3 box of Cheerios."

What Inflation Adjustments Should Mean for Your Cost Strategies

With minimum wage adjustments on the horizon, HR leaders can glean much from the abundance of research available on the impact of cost-of-living adjustments. While there is some impact on employers and consumers, it's nowhere near as severe as predicted.

For many HR leaders, raising minimum and mid-range salaries in accordance with CPI increases simply makes sense. While salaries are an enormous percentage of operating expenses for most organizations, there's significant potential to trace the precise impact of cost-of-living increases on employee engagement and happiness factors. By implementing a comprehensive human capital management solution to aggregate this data, HR leaders can track the correlation between salary and engagement/retention factors at all levels of the organization, leading to precise and situational insight into how their pricing strategies are trending.

Consider Economic Trends

Wage increases aren't as simple as CPI and inflation. While the CPI "all items" index has increased one percent over the last year, per the BLS, economists have forecasted an average 2.7 percent increase in salary budgets in the U.S. in 2016, according to the Society for Human Resource Management. The ADP Research Institute® 2016 Q2 Workforce Vitality Report has found even higher increases due to the tightening talent market. Full-time job holders have experienced an average 3.2 percent increase in wages, while full-time job switchers have had an average growth of 5.1 percent.

While CPI and inflation should help inform your pricing strategy for workers at all levels of the organization, they could lead to a competitive disadvantage if they're not part of a holistic view. In other words, if your competitors are offering wages based on more than just CPI, your retention will likely suffer. In addition to CPI, a smart pricing strategy should take into account:

  • Wage trends
  • Job growth
  • Regional inflation

Should cost of living and inflation impact your minimum wage adjustments? Most likely, but an effective pricing strategy should have more complexity than being solely based on broad national increases in the CPI. By using a mix of smart data, regional trends and business need to shape employee salaries, HR leaders have the potential to optimize their wage plans for employee engagement and retention.

Tags: Compensation