Question

Scott is named your new boss at work. When Scott was hired, you were making $50,000 per year. After a year, he decided to give you a 50% raise and you’re now making $75,000 per year.  

From your perspective, economically speaking only, explain under what type of economic circumstance would Scott be considered a very generous boss?  

Under what economic circumstances, from your perspective as the employee, would Scott NOT be considered a generous boss?

How could you explain why Scott could NOT be considered a generous boss if he’s giving you a 50% raise?

Answer 1

Scott can be considered a very generous boss if a few circumstances hold. Since I am now getting a 50 nominal raise, in order for this raise to translate in my real gain, the rate of inflation should be very low (close to 0-2%). Also, the raise of the other employees who have worked similarly harder is <= 50% so that there is no economic discrimination. The raise will also be very generous if the company itself is growing at much less than 50%.

Scott would not be considered a generous boss if the rate of inflation is very high. If it is close to 25%, then actually the real value of the raise is 0. The cost of living is rising fast and the raise is just enough to compensate for it and nothing more. Also if some of the other employees who have contributed less than me get a higher raise, my economic contributions will be undervalued. If the company is growing rapidly, say doubling its revenues every year, then a 50% raise may not be that high in the bigger scheme of things.