Our Answer this Year is That, to Stay Even in the Growing US Economy…Takes a Nearly 4.5% Increase

It is the time of year again where many employees are being awarded raises and bonuses for work well done and to compensate them for the increasing cost of living in the US economy. A good time of year, for sure, and data suggests raises are higher this year than they have been for some time.

This raise and bonus process is one that gets repeated year after year – so employees must know how much of a raise they need to just keep up in the growing US economy, right? If you mentally (or otherwise) said “yes” to that question, then stop reading right now and think for a moment so you are clear in your mind of what your answer is.

Most people will either not know how to answer this question or will cite something close to Social Security’s annual Cost of Living Adjustment (COLA), the Consumer Price Index (CPI), or another inflation statistic. Many others simply have the feeling that 2-3% increases reflect what is necessary to at least “stay even” or “keep up” – with anything higher than that being a reward for a job well done or for taking on a greater amount of work.

However, as we have repeatedly stated (see here), COLA and the CPI significantly understate the raise amount necessary to Stay Even – which is our goal should be the result of the “average” raise, and as a result, a 2-3% raise is just not enough to keep up in the growing US economy.

What is the right answer then? While this is a hard question to precisely answer, we do need an answer, and if it is not, 2-3%, what is it? We have developed the Staying Even Index to answer exactly this question. Each quarter we calculate the size and growth of the total US Economy on a per person basis (known by economists as GDP per Capita). The growth of this number, the growth of the US economy measured on a per person basis, is our best estimate of the rate of income increase needed to Stay Even. Income increases below this rate will results in individuals falling behind, in feeling poorer rather than wealthier with each succeeding year, and income increases above this amount will results in individuals feeling wealthier – getting ahead compared to the average person.

Through the 3rd quarter (through October) of 2018, this Staying Even Index had grown 4.4% compared to the prior year, meaning that a raise that allows you to Stay Even should be just that - 4.4%. If you receive less than that, you are falling behind, if you receive greater than that – congratulations, you are getting ahead!