In more detail
A raise can be a fixed amount or a percentage, and percentage raises compound: each year's raise applies to the already-raised pay. What you actually feel is the raise after tax, taxed at your marginal rate, and after inflation: a raise smaller than inflation is a cut in real terms. Percentages are not symmetric either: a 10% cut followed by a 10% raise leaves you below where you started.
Why it matters
Comparing a raise with inflation and with what the market pays for the job tells you whether you are moving forward. When negotiating, a percentage of current pay anchors future raises, so a higher starting figure keeps paying off.
Example
A 5% raise on $60,000:
- New pay $63,000, an extra $3,000 a year or $115.38 more per biweekly paycheck before tax
- As an hourly figure over 2,080 hours: $30.29
- At an illustrative 30% combined marginal rate, about $2,100 more a year after tax
- With 3% inflation, the real raise is
1.05 / 1.03 − 1= 1.94% - Three years of 5% raises:
60,000 × 1.05³= $69,457.50
A 10% cut and then a 10% raise on $60,000 gives $59,400.