> I don't think what you're doing provides a "why", really

I disagree.

An employer has a contract (whether literal or not) with an employee to pay a certain amount. They continue to do that, along with nominal raises. This is reasonable.

If they want to hire someone new, that new person will generally demand the market rate, since they can get it elsewhere. This is also reasonable.

The only thing that bothers people is that both of these things occur at the same time.

> I'm not sure I quite understand what you mean by value here, exactly. Value to the employer? That doesn't track the CPI. I think you must mean value to the employee

I mean the value to the employee. Maybe getting slightly too wonky here, but to elaborate: if I hire you, I may offer you a certain amount of US dollars per year. You don't actually care about the dollars. You can't eat them, you can't live inside the bits of paper. You and I only care about them as a store of value that can be conveniently exchanged: a currency. What I'm actually paying you is some amount of value each year.

This is imperfect as a result of inflation. If I pay you the same amount of dollars per year, the value that I'm giving you goes down. So there is some sort of annual raise, generally referred to as a cost of living adjustment, that is supposed to account for that.

In the past couple of years, it hasn't at a lot of places. This is effectively a pay decrease, and is very uncool. Historically, a 2-3% CoL raise per year _would_ match inflation.

I'm pretty sure you know all that, but it leads into:

> Think about it in the market for apples rather than the market for labor, for example. Obviously it does work different in the labor market, but you have to say what the relevant differences between the market for apples and for labor are to explain things.

I don't think I can give a meaningful analogy here. Aside from the shelf life issue, participants in the labor market have agency, whereas an apple doesn't. But, in an attempt to work through it:

If I want to go to the labor or super market to get a new employee or apple, I have to pay the price they are asking. If I don't, I don't get it.

If I already have an employee or an apple, I don't need to pay the market rate. I already have it. I am no longer participating in the market, so the prices there are irrelevant to me.

This is where the major difference manifests: an apple in my cupboard is not going to leave because someone else will pay more for it. An employee might. Simply because I'm not in the market doesn't mean they aren't.

The odds of them leaving, compared to the cost of responding to market fluctuations in their favor only, is generally going to be net negative. If it was not net negative, this wouldn't be a topic of discussion.

In the event that I _know_ it would be painful for a particular employee to leave, most companies have a process for recognizing that and giving an outsized raise, one that meets or exceeds the current market. 'Retention risk', 'Exceeds Goals', giving a promotion or level increase, etc.

All that being said: this is strictly from an econ point of view. I very much don't like thinking of my reports this way, and I don't do it in practice. But when I'm talking with HR and upper execs, this is how they understand it.