The incredible shrinking pay raise: Wages can't keep up with inflation

Pay raises are getting smaller, but consumer prices continue to rise. If the trend in shrinking worker pay raises continues, it could mean stalled consumer spending and a halt to economic growth.

Earlier this year, some 20,000 salaried workers of Ford Motor Co., mainly in the United States and Canada, got their first hike in base pay in two years. It wasn't much: a raise of 2.7 percent, on average. But the Dearborn, Mich., automaker threw in some bonuses in 2011 and again this year.

These days, that looks downright generous.

The annual pay raise – something workers could once rely on – has become a lot more iffy in the aftermath of the Great Recession. Despite rising corporate profits, average wage hikes aren't keeping pace with inflation. Some new workers are being paid less than they would have been five years ago, by some estimates. Hourly earnings for production and nonsupervisory workers rose so little in the fiscal year ending in May that their growth rate tied a 47-year record low, government data show. Given the tight labor market, even those who have kept their jobs have had limited bargaining power on wages and benefit.

"It's a buyer's mar­ket for em-ployers," sums up Linda Bar­rington, managing director of Cornell University's Institute for Compensa­tion Studies in New York.

If pay raises continue to shrink, the trend could crimp consumer spending and overall economic growth.

Consider the government's data on salaries: For the fiscal year that ended in March, wages and salaries grew an average 1.7 percent, according to the Bureau of Labor Statistics (BLS) Employee Cost Index. During the same period, consumer prices rose 2.7 percent. And there is little relief in sight.

"We're expecting another economic slowdown in the US in the second half of this year," says Gad Levanon, macroeconomic research director at the Conference Board in New York. "With the unemployment rate declining slowly, if at all, there are still a lot of job seekers, and employers will still have the upper hand in wage determination. So I expect very low wage growth even through 2013," he says.

To be sure, workers in high-demand sectors, such as high technology or mining, can often command above-average raises, experts say. Also, current workers appear more likely to be getting a raise than new hires are. That may explain why separate private surveys – from WorldatWork, a global human resources organization based in Scottsdale, Ariz., and the Hay Group, a Philadelphia-based global management consultant – showed employers last year projecting budget increases for 2012 salaries at nearly twice the rate of the government's figures: a median 3 percent.

Even these raises are not dazzling by some historical standards. "In periods of expansion over the past decade, wage growth has been in the 3 to 5 percent range," reports Mr. Levanon. He is one of the authors of the conference board's report, "Feeling the pain: Wage growth in the United States during and after the Great Recession," published this spring.

Clearly, the wage picture hasn't thrilled employees, either. In a survey released in April, Glassdoor.com, an online jobs and career community based in Sausalito, Calif., found that less than half of respondents – 43 percent – were expecting a raise in the next 12 months, compared with more than 38 percent who weren't.

Less than 50 percent optimism "isn't good news," says Rusty Rueff, a director at Glassdoor.com, but it was the first time since 2008 that the optimists had outweighed the pessimists. When it comes to raises, employees "are still under water, but there might be a chance to put our head up soon," he adds.

So how can employees get a pay hike in these hard times? Part of the challenge, some experts say, is to prepare in advance of your performance review or request for a pay raise. Understand both the financial condition of your employer and how you've contributed to the organization. Then, proceed to ask in a confident manner for the pay hike you want.

To ease the sometimes tricky process, Salary.com, a career-management website based in Waltham, Mass., that offers salary information for various industries, provides several tips:

Don't be afraid to ask for a raise, especially during a performance review.

Provide a list of your accomplishments over the past year when broaching the subject of a raise, and show how this record of achievement relates to the amount of increased compensation you're seeking.

Be specific: Cite a dollar amount of base pay increase and bonus that you feel you deserve.

If you don't get the base pay hike you want, ask if you can make up the difference with some other concession, such as company stock or added vacation time. If the increase involves a bonus based on performance goals, ask if you can be re-reviewed, say, in six months.