FEBRUARY 21
Why Wages Fall Behind
When Prices Move Faster Than Your Pay
The Signal
Your pay can rise while the life it buys moves further away.
The Reading
Imagine earning 1,000 a week and receiving a pay rise to 1,030. You should be better off. But your rent has risen, groceries cost more, insurance is higher and electricity has increased. Nothing was taken from your pay packet, yet the same week of work now buys less.
Why? Because your wage and the prices around you are not tied together. Your wage is the price paid for your labour. It may change through a contract, negotiation, review or competition for workers. Food, fuel, rent, insurance, healthcare, education and housing are priced by different forces. None has to wait for your next pay rise.
Imagine your wage lets you take three steps forward each year, while everything you need has its own moving finish line. Food might move one step, rent four, insurance five and a home six. Some prices may rise slowly or fall, but when important costs repeatedly rise faster than your wage, the gap gets wider. A bigger pay packet can still buy a smaller life.
Economists call the number you are paid your nominal wage. Your real wage is what that money can buy. If your wage rises 3% while important costs rise 6%, you received more currency but lost purchasing power. There is no rule forcing those prices to return and wait for you. That is how someone can work harder, earn more and still fall behind.
First Principles
Wages and the prices around us are determined by different forces.
A higher wage does not make us wealthier if important costs rise faster.
The true value of a wage is what it can buy.
Today’s Challenge
Think about your income five years ago and compare it with today. Now choose three things that matter to your life: perhaps housing, food, insurance, electricity, healthcare or education.
Have those costs risen faster or slower than your income? If your pay has increased, has your ability to afford those things increased with it?
If your pay packet is larger but the life you are working for requires more years of your labour, ask yourself: am I getting ahead?
Tomorrow’s Signal
The Cantillon Effect