Companies Offering Retention Bonuses Is Boosting Inflation: Will Wage Hikes Push the US Into a Recession in 2023?

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There’s some good news when it comes to salaries in 2023. Companies are now offering big wage increases and raises to keep workers as the job market remains upended. The bad news: The practice is currently affecting inflation and might move us closer to a recession this year.

As the Wall Street Journal reported in early January, “workers are getting their heftiest pay raises in decades,” described as a “stay for pay” tactic by companies to retain workers as filling jobs remains an issue for many employers. Not only that, but as more people quit their roles and seek other employment, it’s put companies in a training hamster wheel that is costing their bottom lines and reducing productivity, says the New York Times, so there’s a lot of incentive to offer financial perks to keep workers.

“It’s true that companies are offering big raises and other retention initiatives to keep their workers from leaving, and this can certainly have an impact on the labor market. If these efforts are successful and fewer jobs become available, it could potentially lead to a tightening of the labor market and put upward pressure on wages. This, in turn, could put some strain on companies’ bottom lines and potentially lead to a slowdown in hiring or even job cuts,” Shri Ganeshram told GOBankingRates.com. He’s the founder and CEO at Awning, a technology company and brokerage firm focused on investing strategies. 

Citing data from the Federal Reserve Bank of Atlanta, the Wall Street Journal found that worker salaries for tenured employees who stayed in their role were up 5.5% late last year compared to the same time in 2021, and it’s the biggest jump in 25 years that the Fed has been keeping track.

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While that sounds like a big win for workers, it’s not so much for the economy. The issue is that companies may offset their cost of paying employees more by raising prices for consumers so that they can stay profitable, which puts the country more rooted in the ongoing cycle of inflation that we’ve been experiencing. Even though the record highs we saw over the summer of 2022 have cooled, rates still remain elevated. According to the latest Consumer Price Index data, we are still seeing 6.5% inflation in all categories. 

“In the case of retention initiatives, it’s possible that they could contribute to a recession if they lead to widespread wage inflation and a significant increase in costs for companies,” says Ganeshram, though pointing to one possible silver lining. “However, it’s also possible that they could help prevent a recession by keeping skilled workers in their jobs and helping companies maintain productivity and profitability.”

Though, if jobs become less available because workers decide to remain in their positions that could mean fewer jobs available overall, which could put the country over the edge into a full-blown recession. As NPR has noted, really the only reason we haven’t tipped over is because of the healthy job market. In 2022, the economy added 4.5 million jobs, “more than refilling the deep hole left by the coronavirus pandemic two years earlier.”

In addition, the unemployment rate remains at 3.5%, which is a record low not seen in 50 years.

In fact, USA Today says that in order to avoid a recession in 2023, wage growth will be a key factor. As the article notes, Federal Reserve Chair Jerome Powell has cautioned more rate hikes will be on the table until wage growth slows.

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“Wages are running … well above what would be consistent with 2% inflation (the Fed’s target),” Powell shared in a December press conference. “The labor market continues to be out of balance, with demand substantially exceeding the supply of available workers.”

Though Ganeshram advises this one piece alone might not be enough to totally shift the tide. “It’s important to note that a single factor, such as retention initiatives, is not likely to be the sole cause of a recession. Recessions are typically the result of a complex interplay of economic, financial, and societal factors, and it’s difficult to pinpoint a single trigger. That said, it’s always important for companies and policymakers to be mindful of potential risks and take steps to mitigate them, whether that’s through retention initiatives or other measures.”

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