This never made sense to me. Doesn't this assume you are spending ALL your income though?

If I make 100K and get a 3% increase, that's $3000 more.

But if I only spend 30K to live, and my living expenses go up 5%, that's only a $1500 increase to my living expenses while I earned $3000 more that year. So how is that a pay cut if I actually have even more money left over that basically just goes into my investment account then.

It's about the worth of what I am receiving from my employer and nothing to do with spending it.

If John makes $100k and lives on $10k, then cost of living increases by 100%. I believe John should be paid $200k, and according to you his salary should go to $110k.