Inflation: Influential, Impactful or Indifferent?
Hypothesis 1 – the Impact (or not) of Macro-economic Factors on salary Increase Budgets
Analyzing salary increases and its interplay with economic indicators such as a country’s GDP and consumer price inflation has been a popular sport among companies and compensation consultants alike. The focus for us here is to separately analyze the impact of each macroeconomic indicator on salary increases.The data (Exhibit 1) for India across the last 14 years presents no clear linkage between salary increases, GDP and inflation. In fact, what can be observed is that while major economic shifts like what was observed in 2001-02 (dot com crisis) and 2008-09 (global financial crisis) have a direct impact on salary increases, minor changes in either GDP or inflation do not influence salary decisions significantly.Even a simple mathematical correlation of each year’s GDP and inflation with salary increases since 2001 throws up insignificant numbers indicating almost no correlation (refer to data in Exhibit 3). The data in fact suggests a weak negative correlation between salary increases and inflation in India and a positive correlation (though weak) with GDP growth forecasts.Even other developing economies such as Malaysia and Philippines show weak correlation with both macroeconomic factors, indicating that in such economies, other factors such as availability of employable workforce, mismatch between labor demand and supply, employee attrition trends and specific industry/sector performances have a greater influence on salary increase decisions than broader macroeconomic factors.However, the same correlation done for developed economies such as UK, USA and Australia presents a contrarian view with high degree of positive correlation (>0.5) between salary increases and macroeconomic ndicators of GDP and/or inflation.
Hypothesis 2 – salary Increases show High correlation to consumer Inflation During ‘High Inflation’ years
To test this hypothesis, we studied the correlation between salary increases and inflation for just the last five years, i.e. the period post the 2008 economic downturn. These years were marked by a higher average inflation rate of 8.9% as compared to an average of 5% in the period 2000-08. The outcome was an astonishingly high degree of positive correlation (0.63), suggesting therefore that organizations revise salary increase
 Exhibit 2 above summarizes the direction of movement of salary increases vis-à-vis movements in macroeconomic indicators.
 Correlation > 0.5 considered meaningful positive correlation with 1 as the best positive correlation.
Exhibit 3 above provides correlation analysis between salary increases and macroeconomic factors for various countries.
 Exhibit 4 above presents the regressed values on salary increases for past years as well as a prediction for the future using CPI
projections. These can be compared with the actual salary increase % for each year to check for accuracy of the model
|