“Inflation is a very dangerous thing—for the economy and for stability,” Prof. John T. Addison, a labor economist with the University of South Carolina, told Government Executive.

“Inflation is a very dangerous thing—for the economy and for stability,” Prof. John T. Addison, a labor economist with the University of South Carolina, told Government Executive. Andriy Onufriyenko/Getty Images

Federal Managers and Recruiters, Take Note: Salaries May Stay Way Behind Inflation's Spiral

Inflation could stymie federal agencies’ efforts to recruit new employees and hold on to existing ones.

From 2017 to 2021, feds got pay bumps that, for most, stayed slightly behind inflation that averaged around 3% each year—adding up to a small but sizeable loss in buying power over the period. Not surprisingly, in our current era of much higher inflation feds are looking at more of the same, only worse. Congressional Democrats have proposed a 4.7% salary hike plus another 4% maximum locality pay boost for 2024 – hefty figures for sure, but still behind the cumulative effect of inflation. And, as long documented in studies, feds have been falling behind a percentage or two most years over the much longer haul—and stumble even further behind when compared with the private sector.

The effect of these trends on federal agencies’ efforts to recruit new employees and retain existing ones is to make those tasks harder. 

Still, even in an economic environment hostile to recruiting feds, there are some notable and, for federal agencies, welcome countertrends. In recent months, to cope with lowered revenues (or as some critics say, simply to cut labor costs) tech companies have significantly reduced their workforces—companies like PayPal, Google and perhaps most strikingly Facebook (whose parent Meta, has cut about 13% of its total numbers.) And federal agencies, as widely reported, appear to be scooping up a number of such folks to fill thousands of long-open STEM and tech posts, and hope for more.

The force behind most of the current turmoil? Inflation. We all know the story. We just don’t know how and when it will end. 

It goes something like this: The American economy was rolling along, until—in the second quarter of 2020—a massive wave of illness and lockdowns brought on by COVID-19 slammed the brakes, threatening global recession. Then, by mid-2021, as extremely low interest rates, enhanced unemployment pay and other programs that had prevented collapse began to overheat already-recovering markets, higher prices crept in. Spiking costs were stubbornly locked in place by the time political Washington and the Federal Reserve (which has raised interest rates 8 times in just over a year) finally reacted, struggling—as they still are—to bring price growth back to sustainable lows. 

And although inflation has dropped by a third since its peak—possibly a testament to solid policy moves, even if they came late—it remains high, at rates not seen in decades. The latest figure is 6.4%, released Feb. 14. So, it isn’t surprising that salaries remain a crucial and moving target for job seekers. 

A Federal Reserve poll done at the end of last year, for example, showed that for already-employed workers, the salary level desired to take a new job is more than $3,000 higher than last year—as a percentage, that jump represents an eight-year high. Officials noted that upward salary pressure is especially strong among younger workers, highlighting that although inflation has eased somewhat the labor market remains particularly hot. 

“Inflation, in terms of its effect on salaries, simply represents a reduction in the real wage for people,” Prof. John T. Addison, a labor economist with the University of South Carolina, told Government Executive. “Then, what follows is people lobbying, trying to get their real wages restored.”

“But in the meantime, their salaries in buying power terms have declined more,” Addison said. “That's the nub of the problem where salaries are concerned.”  

That is certainly how polls over the last year or so—in surveys from The New York Times to FinanceBuzz—peg worker sentiment. 

Sean Snaith, an economist at the University of Central Florida’s Center for Economic Forecasting, added that many younger people may not know the classic term for this is “wage-price spiral.”  

“The actual numerical amount you get in your paycheck doesn't matter, right?” Snaith told Government Executive. “What matters is what those dollars can purchase. We see salaries rising, but the cost of living goes up faster. More money in your wallet, fewer goods and services you can buy. Salaries go up but they don’t keep up.” 

Heightened efforts to keep up with inflation are also fueling a movement for “salary transparency” in jobs, with new laws now in effect in Washington state and California (though, by way of the GS-system, disclosure of a discernable salary range has long been a feature of most federal job postings). 

So, this is where we are so far on the current inflation and the Fed’s efforts to combat it, and some of the likely spillover effects so far on labor markets and pay, including for the federal workforce. 

“Inflation is a very dangerous thing—for the economy and for stability,” Addison said. “It must be tackled. But I think it’s going to be a little more difficult this time. My suspicion is that the Fed’s interest rate rises so far are not really working—or not as expected. It’s a rather stubborn problem—so, soon we might see not quarter percent rises but half a percent ones, and maybe a recession.” 

“We think the Fed is going to have to go higher with the interest rates,” Snaith said. “But we’re thinking this will end up in a ‘pasta-bowl’ recession, not a deep ‘salad-bowl’-shaped recession. We don’t think it will be a deep 2008-2009 kind of deal. Instead, just a gradual slowdown and then a gradual exit from the shallow recession.” 

“As far as the federal government keeping up with salary inflation meantime, I don’t think they’re going to have an easy time of it—unless magically federal agencies suddenly are nimble on salaries,” Snaith said.

Fed Chairman Jay Powell, for his part, this week offered clues in testimony before the Senate Banking Committee about next steps for inflation—and salary—control. He said that the “ultimate level of interest rates is likely to be higher than previously anticipated.” And that supports our economists’ prediction that the government is likely to push back harder on our still red-hot economy, with more risk of some kind of recession, to get wage and price growth down. 

Though there are many predictions, no one, including able economists, knows for sure where this story goes next: whether a long-feared sharp recession, or a shallow recession—or just a slow drop in inflation toward a so-called “soft landing.” This last possibly would, of course, be good for average workers—especially fed workers, since historically federal compensation never keeps pace with high inflation or spiraling salary contests.