How Inflation Affects the Labor Market

It’s easy to think of salaries as independent of inflation, especially when you see that the minimum wage holds relatively steady year to year. But the truth is inflation influences what a company pays its employees. As your employee’s cost of living goes up, so does their restlessness regarding their current salary. They increasingly wonder if they are worth more and if they can make more by moving on.

Inflation impacts all salary levels, naturally, but the lower the wage earner, the more pronounced the effect. Low-middle-wage earners spend a higher percentage of their incomes on necessities, making cutting back hard.

Ideally, a company will offer similar compensation to its competitors, so it’s critical to understand what your competitors pay. You can count on their payroll going up just like yours during the inflation period. They’re either adapting to facilitate growth or losing workers.

At the same time, no business would be wise to pay too much. You’d lose profits that way, too, and eventually need to cut employees.

It’s important to realize that inflation hits businesses from many angles. Not only are raw materials on the rise. You’ll need to deal with high unemployment, so it’s hard to fill positions. You may also have high employee turnover as remaining employees either burn out because you’re understaffed or find your competitors pay better.

This delicate situation increases the risk of company failure. But this is manageable. You can increase profitability during the pandemic despite the labor shortage with the right financial strategies and systems.

How Does Inflation Impact Minimum Wage?

As inflation increases, minimum wage increases and vice versa. These two factors go hand and hand. When employers need to pay more for labor, they must pass some of that cost onto their customers. When things cost more, employees need more money to live. But there’s another side of this that we must not forget.

When employees make more money, businesses can charge higher prices for products without customers feeling the effects, so now is the time to evaluate your prices.

How Inflation and The Labor Market Affect Your Business

You have to pay even closer attention to how you set prices and how much you pay your employees. Now is the time to get this right because if you fail to select the correct price soon or pay employees too much, you risk losing employees and customers. You ultimately put your business at risk of failure if you don’t make the adjustments.

To manage the effects of inflation, you must look at finances holistically. Yes, costs are going up, but so are your prices, and the amount customers are willing to pay for your products.

And the good news is because inflation is impacting everyone, your customers will expect your prices to go up.

How an Accountant Can Help

An accountant can help you set prices and wages to match your business and meet the demands of inflation. They can assess your competition and the market, to help you make data-driven pricing and wage decisions.

At U-nique Accounting, we help you set up processes to maintain a financial system that matches the economy, so as these and other changes arise, you can confidently adapt and thrive financially. We help you work smarter, not harder.