Employees Get Cost-of-Living Increases to Fight Inflation
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Here's your Money Briefing for Wednesday, January 5th. I'm J.R. Whalen for The Wall Street Journal. We talked earlier this week about how many companies are budgeting for salary boosts in 2022, both to entice new recruits and retain existing staff. But as inflation continues to rise, companies are also earmarking funds for cost-of-living adjustments, or COLAs.
your wage increase is kind of tied to inflation. So if inflation rises 6%, you get a 6% wage increase. If it rises 3%, you get a 3% pay increase. So it's there basically to protect you from rapidly rising inflation.
So who's in line for a COLA raise? And why are some economists raising red flags? WSJ economics reporter David Harrison has been digging into the numbers, and we'll talk to him about it after the break.
As inflation takes a bigger bite out of people's bank accounts, many companies are boosting the cost of living adjustments, or COLAs, that they give employees. And while those increases could help workers make ends meet, many economists have raised concerns about their long-term economic effects. WSJ economics reporter David Harrison has been going through the numbers and is with us to explain. David, thanks so much for being with us. Sure thing. Thank you. So, David, these cost of living adjustments, or COLAs, have been around for a long time. Why are we hearing about them so much now?
Yeah, so coal is really irrelevant at a time when inflation is rising rapidly. So for the past three decades, we really hadn't seen much inflation. So it really wasn't advantageous in contract negotiations for labor unions to try to negotiate for a cost of living adjustment. Now that inflation is back and is rising rapidly, all of a sudden a COLA makes a lot more sense if you're trying to negotiate wage increases for your members because it basically protects them from the rise in the cost of living.
And what's the difference between a COLA and a traditional pay raise?
Well, a traditional pay raise is just that. I mean, you get a raise of a certain percentage or a certain amount that's basically set by either between you and your employer or by your employer. But it doesn't take into account inflation. So if inflation is, say, 5% and you get a pay raise of 4%, you're actually missing out because your cost of living is going to go up faster than your pay raise. The difference with a COLA is that your wage increase is kind of tied to inflation.
What are cost-of-living adjustments (COLAs) and why are companies using them now?
So if inflation rises 6%, you get a 6% wage increase. If it rises 3%, you get a 3% pay increase. So it's there basically to protect you from rapidly rising inflation.
So what triggers these COLAs to go into effect when inflation starts to rise significantly?
A number of things. In the case of union contracts that have COLAs, it's the agreement between the labor union and the employers. In that case, that's something that's hashed out and negotiated. We've seen lately a few major contracts that have included a COLA clause. In that case, that's where it's spelled out. Some states also have a cost of living adjustment tied to their minimum wage rates. When inflation goes up, your minimum wage goes up. And so that's going to happen this year as inflation has gone up. These states are going to see a minimum wage workers in several of these states like Arizona or Colorado or Minnesota are going to see their pay go up.
And these minimum wage workers, are they also union employees?
Not necessarily. No, these could just be people who work minimum wage jobs.
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