Fake Wealth

Everyone loves a pay raise. We automatically get excited because with the arrival of that next paycheck, we will immediately see an increase in purchasing power. On top of that, we fill up with pride knowing that we are being rewarded for our hard work, production, and efficiency while performing our job. Sounds great doesn’t it? It’s the perfect reward in a capitalist economy. Work hard, make more money, increase your personal wealth, and purchasing power. However, I don’t think the equation is as great as some may believe. Our minds are clouded with the amount of dollars we are earning and not with the actual purchasing power of those dollars. Let’s take a look at some numbers over the last 10 years and see if we are actually better off today than then.

Researching the internet provides a vast amount of data and I’m going to quote a few statistics to drive home my “gut feeling” that we are at, or below, the standards of purchasing power 10 years ago. The two things I am going to focus on here are rates of inflation and average American wages. On one hand, we have a value displaying the erosion of purchase power, inflation. On the other, we have the value showing our increase in purchase power, wages. Utilizing these two values, we can find out if we are balancing the equation or if we are losing or gaining. I’m not going to include investments and increases in property value in our discussion. My reason for doing so revolves around replacement costs. If your house is worth $250k and you sell it for a profit in a high margin housing market, you still have to replace your living arrangements in that same high margin market. The vast majority of Americans don’t have investments in their name which do not require replacement. I.E. we are living in, on, and from our investments.

So, let’s take a look at inflation over the last few years. From the year 2000 until now, the average yearly inflation averages out to about 2.94%. That’s fairly normal considering most people account for a 3% per year inflation value. However, our current year’s value is running about 1.25% higher on a yearly basis. Inflation is currently growing in our economy with 3 of the last 4 years being above the 8+ year average. That’s not a good thing. Our purchasing power is eroding even faster these days. But, is our wage increases providing enough of a buffer to actually offset these erosion costs?

Over the ten year period 1997-2006, the average US wage increased by an average of about 3.3% per year (rough calculations). Wait, based on the inflation average above, that doesn’t sound great does it? No, it’s not great. On average, inflation has been about 3% while wages are coming in at around 3.3%. How does that make you feel about your hard earned cash? Yes, you are receiving “wage increases,” but your purchasing power has been barely staying above the drowning stage. As a side note, nearly half of those years were below 3%.

The amount of dollars blinds us from the real wealth we have earned. In reality, we are actually earning just about the same as we were a few years ago. Our wage raises have been eaten away by the rising costs of products and living within our economy. Of course, this is based on rough math and strictly focused on average wages in the US but the fact of the matter is, while we are earning more dollars, our dollars are not stretching any farther. I’m not even including the weak dollar in the world economy. That would throw a whole new wrench into the true wealth of our nation.

It used to be great to enter your meeting and potentially receive a raise. But, that raise may not even be a raise. Remember from above when we attribute earning raises to working hard, doing our job well, and performing above average? Next time you get a wage increase, figure out your percentage without inflation. If you got a 3% raise, guess what, you are making the exact same amount you were a year ago in terms of real money. If you got a 5% raise, you earned a 2% raise for a year’s worth of hard work and dedication. I’m sure you are getting the point.

Businesses know they can cloud the minds of employees by the basic dollar amount. Why do you think they talk in terms of yearly gross pay? Let’s say you make $10 per hour and you get a 3% raise. You immediately start making $10.30. On a 40 hour week, that’s only $12 “extra” dollars, but over 52 weeks, that’s a raise of $600+. You may think you have an extra $600 to spend. Nope. You have exactly what you had last year as inflation will erode your “extra” dollars over the next year. So, the business representative will quote you a 3% raise along with the gross pay you have for the year to cloud your mind about your real earnings. Big numbers usually do that, especially in situations that create angst and nervousness.

What would it take for you to be truly satisfied concerning your year’s worth of dedication, loyalty, and excellent performance? Do you believe that 52 weeks of hard work and excelling at your position should be fairly rewarded with a 3% raise? What about 5% or even 10%? Based on the average salary at the end of 2006, Americans were making $16.75 per hour ($34,840 yearly). If you were to think that a year’s worth of exemplary work entitled you to a raise of 5% you would actually be asking for an 8% raise (throw away the 3% inflationary costs). That would be a tough sell. Businesses are more apt to throw around inflation inclusive raises of 5% and less for the majority of employees and reserve any higher numbers for a miniscule fraction of workers. An 8% “total” raise on the average worker would yield a gross pay of $37,627. That’s a pretty large increase in total dollars ($2,800). But, remember, 3% of that disintegrates as if you were burning it in a blaze of glory. In reality, you are looking at an increase in wealth of about $1,750.

As wage earners, we must always know about our true purchase power. How much is our dollar actually worth to us? Are we truly making more money this year than last even with the raise we “earned?” On average, Americans are sitting in the middle of this teeter totter. Our nation’s personal purchasing power on average is not growing even though we are the most productive country on the planet. Yes, we have more dollars in the system, but the dollars aren’t adding any value to our lives compared to 10 years ago. The next time you are up for a raise and you hear 3%, don’t be excited about your reward. If you have performed your job well and receive a positive review, you should EARN more than a simple status quo raise. Did you get a 5% raise? Nope, you got a 2% raise. Do you deserve more than 2%? … more than likely.

Citation:  http://www.inflationdata.com/ & US Department of Labor