How To Handle The Squeeze From Tariffs, Inflation, and Pay Raises
If you’re running a manufacturing business you’re probably feeling the financial squeeze from both sides. On one hand, prior inflation and upcoming tariffs can drive up the costs of materials and equipment. On the other, your employees are still feeling the pinch from inflation and expecting higher wages.
It’s a tough spot to be in. You need to stay profitable while also keeping your workforce happy and attracting new talent. So how do you navigate these challenges? Let’s break it down.
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Tariff-Induced Inflation: What’s Happening and Why It Matters
We all know tariffs make imported goods more expensive. But here’s where it gets tricky—when companies pass those extra costs onto suppliers, manufacturers, and consumers, inflation rises across the board.
- Tariffs on Steel & Aluminum: If you’re in manufacturing, you’ve probably seen raw material costs spike or are awaiting new pricing from your suppliers. These aren’t small increases—some estimates say they’ve added 10-25% to material costs. Today’s news suggests an upcoming 25% tariff on steel and aluminum.
- China & Mexico Tariffs: Many components and machinery used in engineering and production come from these countries. Tariffs on these imports raise prices before products even hit U.S. factories.
- Ripple Effect on Wages: With inflation making everyday life more expensive, your employees feel the squeeze personally. Rent, groceries, and gas all cost more—so naturally, they expect their salaries to keep up.
A report from the Federal Reserve Bank of Boston estimates that tariffs could add at least 0.5 percentage points to core inflation with estimates ranging up to 0.8 percentage points, depending on how companies adjust pricing. That may not sound like much, but when combined with other inflationary pressures, it chips away at profitability and affects payroll decisions.
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Your Employees Expect a Raise – But Can You Afford It?
Here’s the reality: inflation has pushed employees to expect salary increases just to maintain their standard of living.
- Wages vs. Inflation: Over the past year, private-sector wages rose by 5.1%, but real wages (adjusted for inflation) actually dropped by 1.2%. In simple terms? Even though paychecks got bigger, their purchasing power shrank.
- Employee Expectations: A survey from Paychex found that 72% of employees expect either a cost-of-living adjustment or a significant raise in 2025. If they don’t get it? They’ll start looking elsewhere.
This creates a tough situation for employers—you need to stay competitive with wages, but you also need to manage rising operational costs.
So, what’s the move? A smart, balanced approach to compensation and retention.
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6 Strategies to Retain Your Current Team (While Still Attracting New Talent)
If big salary bumps across the board aren’t realistic, there are still ways to keep employees happy, motivated, and engaged without wrecking your budget.
1. Be Transparent About the Financial Realities
Most employees don’t realize how much tariffs and inflation impact your business. Having honest conversations about rising costs and financial realities builds trust.
✅ Tip: Hold quarterly town halls or team meetings to explain economic pressures and discuss how you’re working to balance fair wages with company stability. Your employees know costs are going up. Ensure you are doing more than just maintaining margins.
2. Offer More Than Just Money
If big raises aren’t in the cards, sweeten the total compensation package with creative perks.
✅Consider:
- Performance-based bonuses instead of fixed salary increases.
- Additional PTO (people value time off just as much as money).
- Professional development (fund training, certifications, or courses).
3. Invest in Professional Growth & Career Progression
One of the biggest reasons employees leave? Feeling stagnant.
✅ Tip: Offer internal promotions, cross-training, or new leadership opportunities to keep employees engaged. Developing mentorship programs can help develop new leaders while providing exciting challenges for mentors.
4. Introduce More Flexibility
Post-pandemic, employees value flexibility more than ever. While remote work isn’t always possible in manufacturing, hybrid schedules, 4-day workweeks, or adjusted shifts can be a major selling point.
✅ Tip: A study by LinkedIn found that workers are 2.6x more likely to stay at companies that offer flexible work arrangements. More than half of the candidates I connect with ask about flex or WFH options, even for similar wages. Companies offering this flexibility will be highly sought after by candidates.
5. Recognize & Reward Employees More Often
When employees feel undervalued, they start job hunting. I hear it every day from candidates. You don’t always need money-based rewards—sometimes public recognition, a small bonus, or even a personalized “thank you” from leadership goes a long way.
✅ Tip: Implement an Employee of the Month program or send handwritten thank-you notes to top performers.
6. Be Strategic About Hiring
Bringing on new employees in an inflationary environment is risky, but necessary. Make sure each hire is a long-term fit by refining your hiring process. The means go beyond the skills and experience. How has the candidate achieved what you’re looking for in a similar environment using comparable resources?
✅ Tip: Use interview techniques that align with your needs (I personally use performance-based interviewing) to ensure candidates align with your company culture before extending offers.
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Final Thoughts: Finding the Right Balance
There’s no denying it—tariffs and inflation are putting serious pressure on businesses. But instead of panicking, a strategic approach can help you navigate the storm.
- Keep communication open with your employees about financial realities.
- Get creative with benefits, flexibility, and growth opportunities.
- Balance retention and hiring strategies to keep your business strong.
At the end of the day, employees want to feel valued, respected, and financially secure. If you can offer that—even without massive salary increases—you’ll keep your best people while still attracting new talent.
Need help finding the right engineers for your team? Let’s talk about how to attract and retain top talent in today’s job market.