Will Raises And Bonuses Be Inflationary? Maybe Not- By NEIL SISKIND

Remember that raises are not tax cuts. Raises and bonuses are monies transferred from businesses to individuals. So consumers have more money- but businesses have less.

Some businesses have simply decided that instead of keeping X dollars of revenues, they will allow employees to have X dollars of revenues.

This is different than if businesses paid employees exactly the same amounts of money and then the government took less from the employee in the form of a tax cut. In such case, both businesses “and” employees would have more money to spend. But, a raise in salary or a bonus is a net transfer of wealth from one “spender” to another “spender”.

In fact, some would argue that a dollar spent by the consumer has less of a multiplicative value to the economy than if that same dollar was spent by a business (in cap-ex or what have you). So, in this regard, raises and bonuses may actually be less inflationary than if a respective business kept and spent that dollar. Raises may actually be “deflationary” in that they take away money that a company could have invested to create jobs through cap-ex (causing increases in labor demand, wages, and commodity prices) and puts those monies in less inflationary hands. Again, if there were a tax cut to employees by the government rather than a bonus or raise to employees from businesses, there would be more potential for inflation where it’s clear that a dollar spent by a consumer is more stimulative to the economy than a dollar taken and spent (read: wasted) by the government, and the business has not lost anything.

In any event, regardless of the source of more monies to employees, consumer spending may not lead to CPI inflation where structural issues in the economy, including Amazon, are forcing downward pricing pressures on businesses in order to compete. Companies lacking pricing power will not, necessarily, get pricing power just because consumers have more money in their paychecks.

In sum, demand side spending may not cause inflation if businesses lack pricing power, and if businesses also have to cut back on investments or growth initiatives because of the higher wage expense. Conversely, though, supply-side spending can be inflationary in all regards- prices, wages, commodities prices.

Tax cuts would be more inflationary to the demand side then rising wages because it gives businesses “and” consumers more cash- rather than wage raises, which are just a transfer of cash from businesses to consumers- which may affect the overall economy less than if businesses invested that same money in growth, rather then pay it out to employees.

Wage inflation, thus, may actually be “deflationary” to the overall economy, as it depletes businesses’ coffers and, thus, depletes supply side investment.

It’s a lot of thinking. Let me sleep on it. Maybe I’ll see it differently tomorrow.





Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s