Relationship between the Consumer Price Index & wage explained through a story | Low wages can hurt both the employer and the employee
His name is “average” Joe. He used to work for a maple syrup producer and spend all of his disposable income on buying delicious BeaverTails.
Everything changed when the Corona virus swept across the country, killing thousands of people. In response, the government closed inessential businesses, telling everyone to “STAY HOME!”
As compensation, the government gave 2000 dollars bi-weekly to Joe. Now, he can stay home without worrying about his job. But Joe wasn’t happy. With this lockdown, no store was selling his beloved BeaverTails.
It was awful living without a purpose and dream. The entire day revolved around watching the news, waiting.
Until one day, a presidential address declared victory over the virus. With it, the lockdown finished.
Soon after that, Joe ran to the nearest BeaverTails store. Then he bought BeaverTails with all the money he can afford. Now, with arms full of BeaverTails, Joe returned home happy.
The next day, Joe returned to his old job at the maple syrup factory. Work was very gruelling because they were receiving an unprecedented number of orders. Joe had to work nights and days, filling in those orders.
He expected a raise as he sold an exceptional quantity of maple syrup. Unlucky for him, the factory owner postponed the discussion altogether. As the company lost too much money during the lockdown, the company couldn’t afford a raise.
Joe was sad. He couldn’t buy as many BeaverTails as he once did when he had government money.
A year passed. The factory owner needed to decide what to do with Joe now. In his mind, Joe deserves a raise after all his work. Despite this, he isn’t sure whether he can afford it as this year’s sale is down relative to the last year.
He found the answer by asking one of his clients, BeaverTails company. Last year, they ordered a large quantity of maple syrup as an ingredient for their delicious pastry because Joe was buying everything in their stock. Thus, when Joe couldn’t afford to buy an extensive amount of BeaverTails as he once did, the sales level went back down to the pre-government money level. Hence they reduced the maple syrup order.
From this discussion, the maple syrup factory gave Joe his raise, which he can use to buy more BeaverTails now.
This story was a quick analogy to showcase the relationship between Consumer Price Index (CPI) and wage holistically. There is a strong and positive correlation between CPI and wage. It makes sense because CPI monitors change in consumer prices, and increasing consumer price means demand is high and firms are doing well.
From this, you would also think the wage growth tightly reflects the CPI growth. But to my surprise, they had a one-year lag between them. This lag nullified many economic catalysts and shrank the market. High demand isn’t sustainable for long without the money to support them.
In conclusion, we need a faster and more fluid system of managing wages to capture all these lost opportunities.