Effect of inflation on wages - Research Paper Example

? Effect of inflation on wages Introduction Inflation means the rate of rising of the level of prices for goods and services while at the same time the purchasing power of goods and services is falling. Other definitions describe inflation as the uprising movement in the moderate level of items. All in all, inflation denotes an unfavorable situation in the economy of a nation. On the other hand, wages refer to a form of remuneration offered to an employee by an employer of a particular company in exchange for services rendered. Wages are normally paid to employees after a particular time period. The paper will determine the fact whether inflation has a negative or positive effect on wages of employees in institutions of a particular country. Upon getting the findings, the paper will further analyze what is expected to be done to avert the effect on the inflation. In order to answer these critical questions, I will sample data from a few companies that will act as the representative samples of companies across the country. After the exercise of data collection, I will record it using favorable methods then analyze it scientifically in order to draw varied conclusions from it. By so doing, the research question will be answered. I have ensured that the methods used for data collection and recording are effective so that the findings drawn from the data are effective. I have used both quantitative and qualitative methods for the processes of data collection and recording. This will ensure that the data collected has no bias and is effective in answering the research question. To determine the rate of inflation, will need collection of values of inflation over time and the correlated change in the wages of employers that cut across companies in the country. The analysis of the collected data will; require scientific methods because issues to do with economies ought to be projected by professionals who are well versed with the research topic. This would require economic analysts in my research team. Choosing the methods for data collection is another important factor because some methods are more suited in collecting particular types of data as compared with others. Others are also more suited in recording some data types as compared to others. This disparity in the methods depends also on the nature of the respondents from which the data is collected from. Some may be willing to give data to a research team while some may be uncooperative in giving the data out. The research team is, therefore, required to develop a good rapport with the respondents so that they are able to collect optimal data for analysis. Another important thing in answering research questions is ensuring that the equipment for data collection are in a good order so that the research team is not frustrated in the fieldwork day for the actual process of data collection and analysis. To avoid any mishaps in data collection, all equipment should be investigated and checked days to the actual day of research. In discussing the research issue, I will first give a literature review of the research topic. I will then give a strategy for the hypothesis of the topic. The last section will illustrate the data methods used, their efficacy and the findings. I will then give a conclusion of the research topic. Literature Review Inflation is a noteworthy aspect of any nation’s economy. It is opposed to deflation which describes the downward spiral in the average prices of goods and services. It is, therefore, clear that the only difference in inflation and deflation is the aspect of price stability. There is also a strong link between inflation and money in any country. Because it is a rise in the general level of prices of goods and services, it implies it is extremely linked to money. By being intrinsically linked to money, inflation has an effect on the economy of a country. It affects many aspects of the economy and the nature of cash flow in a country. As a result of this, it is extremely important to study the effect of inflation on the wages of employees of a nation. By determining any effects, it will go a long way in rescuing aspects of the economy that have been affected ( Wilson, 2009). Inflation is linked to money in a nation, and, therefore, it affects the supply of money. Research has indicated that inflation is caused by interplay of four reasons; supply of money going up, supply of other goods going down, demand of money going down due to the increased supply and the subsequent increase in the demand of other goods. This, therefore, will cause an upward spiral in the prices of the goods and services because their demand has increased. The goods are so minimal so that a lot of money is required to acquire them. As a result of this, inflation is often described as the principle by which too many dollars are chasing too few goods. This is a very true analogy ( Welch, 2008). The affect of inflation on money and money supplies implies that all aspects of remuneration are affected. This includes wages, salaries and any form of benefits that an employee of a company is entitled to. To understand this point, let us imagine a nation has only two types of commodities; lemons and money that the government mints. When there is drought, lemons in the country become a scarce commodity. As a result of this, the prices of the lemons will skyrocket. This is because there is a small amount of money that is chasing the scarce lemons. This scenario reflects inflation (Pickford, 2008). Therefore, we can have inflation in a nation by varying the amount of money that is flowing in a system. This means that if a given government decides to mint plentiful amounts of money, the money will become so plenty relative to goods, just like the drought scenario above. Since the money is so plentiful in the population relative to the goods and services, its demand will go down. Then the price of the goods and services will subsequently increase. This will amount to inflation. When the demand for money goes down, this will have an adverse effect on the manner in which employees are paid. The wages will become likely suppressed in response to the low demand of money. The increase in prices of goods and basic commodities will also imply that the wages rendered to employees will be insufficient to buy basic commodities. Most employees will struggle to foot bills under these scenarios unless the prices of goods normalize (Hall, 2005). Due to these reasons, most banks try to stop severe inflation and adverse deflation so that excessive growth of prices of items is kept at a minimum. This will further help most employers so that they can have good value for their wages. Statistics reveal that, in the US, if the rate of inflation is 2%, a $1 pack of sweets will cost $1.02 in a year. This implies that employees will spend more than they were spending in commodities. They are, therefore, expected to adjust their wage spending. The employee would, therefore, not be able to purchase as much with a dollar of his/her earnings as he/she previously could. Research has shown that inflation destroys real wages of employees. As a result of inflation, the nominal value of wages and salaries is expected to rise so that employees can be able to adjust to the increasing prices of commodities and services. The nominal wages eventually respond to the soaring price commodities and the crumbling currency by rising. In most countries, this eventual rise occurs in a lag in that it rises at a slower rate than the rate of inflation. However, if the wages are to rise at the same rate of inflation or even faster than the rate of rise of prices, inflation would always lead to a rise in the standards of living 9Welch, 2008). Therefore, countries like US that offer stagnant incomes in a bid to contain inflation are wrong in this. Because, the value of wages is affected, the only way to increase this value is to increase the nominal wage at a faster rate so that improved living conditions are improved. Some quarters argue that rising wages are the cause of inflation, but many economic tenets have disapproved this assertion. It is the inflation that causes a rise in the prices of commodities. Over and over, employees approach their employers to adjust their wage packages because the value of living has increased. For example the prices of fuel increase adversely so that the employees have difficulty in coming to the office to work in time. In turn, the employers increase the transport allowance of their wage package so that the living standard is increased (Welch, 2008). Very high inflation rates distort economic performance and decisions. It may also distort investment decisions. All these factors have an adverse effect on the wage packages of employees. It may either improve the packages or consider a pay cut for the employees depending on a company’s policies. A company may decide to consider a pay cut for its employees so that the company can manage to shoulder the economic burden that comes with huge prices of goods and services that is brought up by inflation,. On the other hand, inflation may cause a company’s employers to make decisions that favor the employees. It may consider increasing the wage pack so that the employees are motivated to work in the wake of the adverse economic conditions. All these depend on a company’s policies and decision making (Pickford, 2008). Reducing inflation has been shown to cause unemployment during the adjustment period. As a result of this, some economists argue that 2-3% inflation is better for the economy of a country as compared to a rate of zero percent. A rate of zero percent they argue that, causes adverse effects in unemployment and wage packages. The government may try to increase the wage packet to favor the employees and cause more inflation while it may consider a pay cut and adversely affect the living standards of employees of a company. However, it is difficult to convince the public about this point. Most Americans argue that inflation of any rate lowers the living standards and, therefore, their wages cannot be able to put up with the rising (Welch, 2008). Such anxiety is dominant in retirees who are uneasy about adjustments to their wages, pensions and financial investments. Because of this reason, the government is required to make expectations about the future of retirees. As a result of inflation, the expectations of a government about the investments of retirees are distorted. This is because a series of unanticipated rises in the prices of goods and services erodes the real value of investments. It is further important to note that inflation increases further as the employees near their retirement period. For example, citizens of the US differ in the valuation of effects of inflation. Those born before 1940 experience much adverse effects as compared to those that are born after this time period. Justification of hypothesis It is, therefore, clear that inflation has an adverse effect on the wage packages of individuals together with any financial benefits that accompany the wage packages. The public does not favor the idea of inflation because it increases the standard of living and has an adverse effect on the wage packages. The wages may be reduced so that the government can cope, or they may be increased at a very short rate that does not come up with the rate of inflation. Much of the public opinion is, therefore, against the idea of inflation. Employees also are not for the idea of inflation because they feel it makes it easier for the government to conduct its operations. It further makes it easier for the government, financial institutions, and their employers to deceive them. The employees feel that the confusion created by inflation makes them vulnerable to tricks that financial institutions and the government may want to play to them. The government may try to confuse the public by advising on the reasons for earning a pay cut instead of earning a hefty pay rise with the coming up of inflation (Pickford, 2008). Inflation further affects employees adversely according to public opinion. It creates opportunities for some institutions to hoodwink employees who are unsuspecting of the ploy. This is because inflation can increase the complexity at which financial assets and wages are evaluated. This aspect ensures that only the sophisticated and knowledgeable actors in the market make decisions in business issues of the government. This is detrimental to the common employees. For example, after inflation, the government may ignore to change tax brackets. As a result of this, the common man is forced to pay higher taxes. This reduces the wage package that is available for use by the employee. This further justifies the fact that inflation has a negative effect on the wages of employees (hall, 2005). Such similar episodes of confusion can operate within firms. One such hypothesis is that managers may be tempted to be complacent in judgment about profits with an increase in the price level of commodities. For example, the Federal Reserve Board has observed that a company’s productivity may rise quickly with stability in prices. However, with inflation, the companies are forced to increase profit margins through innovation. This implies that inflation weakens the judgment of companies’ managers about the performance of the business. This may indirectly affect employees’ wages when the company’s management realizes that their judgment was flawed and defunct. Overall, respondents agree that inflation has harmful effects to the economy of a country; it reduces the living standards of employees by increasing prices of commodities before wages and pensions increase to counter the adverse effects. As a result of this, deceptive behavior is fostered by the government and many financial institutions. The public also agrees to this notion by giving many negative views about inflation and how it has continually affected their wages, salaries, financial benefits and pensions. It is, therefore, important for any government and financial institutions to come up with favorable economic policies that ensure that inflationary changes do not affect wages of employees adversely. Contradictions Some pundits and economists argue that inflation benefits the public and the economy of a country. Some also argue that it is an increase in wages and salaries is what causes an increase in inflation. However, this does not make sense at all because without inflation, prices of commodities cannot shoot up. Without this also, employers would not see the reason of increasing wages of employees. Such employees who increase the wages of employees when there is no inflation only do it as a way of motivating workers and also due to a company’s policy. Some companies, for example, have a phenomenon referred to as job grouping. With an increase in the number of years that an individual works in a company or for the government, the wage package also increases. There is no way that such an increase in wages can cause inflation. On the contrary, an increased wage package in times of economic normalcy is likely to enhance the living standards of people, and not cause inflation (Hall, 2005). It is also surprising that regardless of these claims, not a single respondent has talked of any benefit derived from inflation. All the public complains about is the negative effect of inflation on their wages and pensions. Worst affected are retirees who feel that inflation ruins their investment procedures and plans. This further causes financial uncertainty to their futures. Therefore, the claims that inflation may be caused by increases in wages are baseless. Data Collection A variety of methods are used in gathering information on inflation and the effects it may have on wages of employees. This ranges from stock reports, bank analyses, financial books and journals, direct observations of phenomena, and deriving opinions of the public, economists and financial managers on the effects of inflation. Forex reports are another source of data on the aspect of inflation. All these methods have different degrees of reliability in data collection. The different modes of data collection also require at least 3 years for collecting and analyzing. This is because inflation requires a long time period to observe the trend. Also, in order to observe the effects of inflation on various wage packages, it requires a longer time span. Interviews Interviewing the public is one of the most reliable methods of determining the effects of inflation on the wage packages of employees. This method ensures that the researcher gets first hand information on the research topic. By interviewing the American public on the effects inflation has had on their wages, it has been determined that the wages have been affected adversely. No respondent has managed to give any positive effect of inflation on wages. This method took at least one year to document before a definite analysis would be made. Direct interviews are a reliable method for data collection because it captures the real situation on the ground. The only setback is that it requires skilled personnel and high finances to conduct. Stock reports Stock reports are another reliable source of data about inflation. It projects inflation over years in the form of line graphs. This occurs over a span of two to three years. For example, one stock report that appeared in a magazine recently shows that the Consumer Price Index ( CPI), a component of inflation has increased in the past 9 months consecutively. The stock reports also analyze the value of the American dollar over years when compared with other currencies I the world. For example, stock reports have analyzed that in the past 12 months, the US dollar has lost 8% of its value when compared with 6 major world currencies. The same analysis projects that the dollar has lost about 19% of its value when compared with 19 world currencies. These stock analyses are then used to determine the corresponding change in wage packages per each degree of drop in the value of the US dollar. Stock reports are reliable in that, the methods used for analysis are scientific and, therefore, the margins of error are minimal Financial journals Financial journals are another excellent method for projecting inflationary changes. These journals are published constantly so that the public is aware of the financial occurrences of the state. One such journal in the US titled- Daily Forex Market news and Analysis- indicates that for the year ended 2010, average hourly earnings reduced by 0.6% in march and an overall drop of 1% for the whole year. This represents the biggest annual drop since 2008, an indication of the adverse effects inflation has had on earnings of employees. Financial journals are another reliable method for documenting changes that inflation has caused to employees. It has the advantage of being cheap because financial Journals are cheap, but it requires skilled personnel to analyze the financial reports. References Hagger, A. J. (2007). Inflation: theory and policy. London: Macmillan. Hall, R. E. (2005). Inflation, causes and effects. Chicago: University of Chicago Press. James D. Gwartney, R. L. (2008). Macroeconomics: Public and Private Choice. New York: Cengage Learning. Pickford, J. (2008). Mastering management 2.0: your single-source guide to becoming a master of management. New York: Financial Times/Prentice Hall. Sarah Sanderson King, D. P. (2007). Lessons from the recession: a management and communication perspective. New york: SUNY Press. Welch, F. (2008). Minimum wages: issues and evidence, Volume 29, Issue 3. Yew York: American Enterprise Institute for Public Research. William T. Dickens, L. G. (2006). How wages change: micro evidence from the international wage flexibility project. Brussels: National Bank of Belgium. Wilson, T. (2009). Inflation. Massachusetts: Harvard University Press. Appendix Descriptive Statistics Year Drop of wage in 1st quarter of year (%) Drop of wage in second quarter of the year (%) Drop of wage in 3rd quarter of the year (%) Drop of wage in 4th quarter of the year (%) 2007 0.3 0.43 0.58 0.59 2008 0.5 0.7 0.72 0.69 2009 0.45 0.47 0.6 0.52 2010 0.6 0.8 0.79 1.0 The above statistics reveal the effect inflation has had on the earnings of employees in a sampled group. It is clear that as much as inflation is expected to increase wages, employers have found a way to hoodwink employees with a subsequent reduction in the earnings. The maximum drop achieved over the last four years is 1% at the end of 2010. The minimum is 0.3% achieved at the start of 2007. . Read More