When the price of goods and services increases faster than the size of your paycheck, you’ll have less money in your pocket. That’s a main reason workers are so concerned about inflation, even if conventional wisdom suggests that wages eventually catch up with minimal overall impact.
But inflation’s cost to workers is higher than previously thought, according to a study that takes into account the “conflict costs” associated with lower wages when prices are going up. Accounting for those—the discomfort associated with asking a boss for more money, soliciting other job offers, or engaging with a union—changes our understanding of inflation, according to University of California at Los Angeles’s Joao Guerreiro, London School of Economics’ Jonathon Hazell, UC Berkeley’s Chen Lian, and Chicago Booth’s Christina Patterson.
The researchers take as a starting point the observation that when inflation kicks in, employers don’t follow up with automatic pay hikes. “Instead, workers have to fight for these raises, which places them in conflict with employers,” they write. They could, alternatively, accept low pay growth, in which case they suffer from wage erosion. Incorporating these costs and dynamics into economic models could meaningfully change our understanding of the costs of inflation, both analytically and quantitatively, the study argues.
The researchers surveyed 3,000 US workers in February and March 2024, in the aftermath of postpandemic inflation, asking about their experiences in the prior year and hypothetical future situations. Survey respondents shared how much they felt pinched by inflation, whether that had driven them to seek more pay, and how they expected to react to any inflation coming down the pike. The researchers then built a model to examine how inflation affected wages when workers essentially tacitly accepted the situation or pushed back.
Inflation significantly affects worker welfare, research finds, and “conflict costs” (incurred when workers have to negotiate, solicit job offers, or otherwise push employers in order to obtain higher pay) are what account for most of the hit.
In the survey, most respondents said they didn’t think their employers took inflation into account when offering merit increases. They expected employers to raise their offers by just 0.05 percentage points for every 1 percentage point increase in annual inflation.
However, respondents also clearly disliked working to secure a raise. They said they would pay to avoid conflict with their bosses, with the median worker agreeing to sacrifice 1.75 percent of their wages to do so.
Nearly 80 percent of survey participants—including younger employees, government workers, and people with higher incomes—said they accepted their employer’s default offer in 2023. The remaining 20 percent said they engaged in conflict to secure a higher salary. The respondents who asked for raises (or for an increase from what had been offered) reported getting about 5 percent more in 2023 compared with about 3 percent for those who did not push back. Those who did not ask for more estimated that doing so would have increased their median pay by 2 percentage points.
As inflation climbs, so does workers’ willingness to engage in conflict with employers, the survey finds. Among the portion of respondents who asked for a raise in 2023, nearly 70 percent said inflation was the main reason. When faced with hypothetical scenarios, less than half of workers said they would engage in conflict with inflation at 2 percent, but more than 60 percent were willing to fight if inflation hit 10 percent.
The researchers calculate that for every 1 percentage point increase in inflation, workers were 1.5 percentage points more likely to ask for a bigger raise. They report evidence of the same trend—more inflation leading to more conflict—when analyzing strikes between 1964 and 2022.
Conflict costs are substantial and worth accounting for, argue Guerreiro, Hazell, Lian, and Patterson. While pushing for more money can drive up salaries, the costs to workers of doing so cancel out the benefits. “Conflict more than doubles the costs of inflation to workers relative to the costs of inflation implied by falling real wages alone,” they write.
Surveys “show that people dislike inflation in large part because they believe high inflation lowers real wages,” the researchers write. “Our mechanism suggests a reason for this view. People know that if prices have risen faster than the default nominal wage offered by their employer, they must engage in painful conflict with their employer to rectify the situation.”
Joao Guerreiro, Jonathon Hazell, Chen Lian, and Christina Patterson, “Why Do Workers Dislike Inflation? Wage Erosion and Conflict Costs,” Working paper, September 2024.
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