How long will it take that new hire with that large salary to catch up to my salary?

Inflation is an evil force which robs us of our ability to properly make comparisons over time. Suppose in 1957 you had finally broken the $10,000 per year salary figure on your last year on the job and thus were earning 50% more than the average engineering salary of $6,695 per year. Imagine how proud you were that you were now making a 4 figure salary, which is well beyond almost all of your peers! Then suppose 30 years later you read that the average fresh-out was making $40,000 a year. You'd shake your head in disbelief at current salaries. How can an average knucklehead now earn so much more than you ever did?

However, inflation between 1957 and 1996 was a factor of 5.57. Thus your salary of $10,000 per year in 1957 dollars is equivalent to a 1996 salary of $55,700 per year. Suddenly that $40,000 a year doesn't seem quite so high. (Although because engineering salaries have in fact increased relative to salaries in general, 50% more than the average engineering salary of 1996 is $90,000 - $100,000 per year, which is indeed much higher than your 1957 salary in 1996 dollars. But at least those people are not the average knucklehead...) Consult a history of inflation rates and conversions to 1996 dollars to convert any given year to 1996 dollars.

One of the more common questions I get as a supervisor is a form of the following:

The mistake that both of these employees have made is to not properly include the effects of inflation. Over both of the professional lives of these employees, inflation began high and progressively got lower. In 1982, 14 years ago, inflation was 6%, having just come down from a peak of 14% in 1980. For the late 1980s, the inflation rate stabilized at 4.4%. In 1989 and 1990, inflation increased to around 5%. Only in the last few years has inflation dropped to around 3%.

To a first approximation, salaries scale directly with inflation. Thus inflation must be added to the expected raise of around 5% for an employee with 10 years experience. If inflation is 4-5%, the total is around 9-10%, which is what these employees experienced and therefore think that those new hires will receive, which is incorrect.

50th percentile engineer salary: Inflation over the 14-year period 1982 to 1996, experienced by the first employee above, totaled a factor of 1.63. Thus his original salary of $29,000 a year in 1982 dollars is exactly the same as the new hire salary of $47,000 a year in 1996 dollars. The only problem is that he never received the $47,000 a year in 1996 dollars - he got 1982 dollars which were worth more, and hence he got fewer of them.

What salary increases will allow the salary of the new hire to catch up to the employee's current $70,000 a year salary? In inflation-adjusted dollars it requires the 14th root of 70/ 47, which is an average annual salary increase of 2.9%, exactly that supplied by the Salary Curve Raises. (Remember that the inflation increase is on top of that, so if inflation averages 3% per year, that employee will see average annual raises of 5.9% before becoming disappointed about his decreasing future raises.)

75th percentile engineer salary: Inflation over the 10-year period 1986 to 1996, experienced by the second employee above, totaled a factor of 1.43. Thus his original salary of $45,000 a year in 1986 dollars is exactly the same as the new hire salary of $65,000 a year in 1996 dollars.

What salary increases will allow the salary of the new hire to catch up to the employee's current $70,000 a year salary? In inflation-adjusted dollars it requires the 10th root of 81/65, which is an average annual salary increase of 2.2%, exactly that supplied by the Salary Curve Raises. (Remember that the inflation increase is on top of that, so if inflation averages 3% per year, that employee will see average annual raises of 5.2% before becoming disappointed about his decreasing future raises.)

Wouldn't it be nice if inflation became zero, thereby eliminating such sources of grief for both employees and supervisors!?


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Copyright © 1997 by Tom Chester.
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Comments and feedback: Tom Chester
Last update: 26 September 1997.