[doktorhladnjak]

It's cheapest overall for an employer to pay market rate for new hires and give existing employees small, regular raises.

If you need to hire someone, you're going to have to pay market rate for a particular hire. You can pay less for less skill or in certain locations. You can try to offer below market and wait for a candidate with few options to accept. But you can't really get around this. If market pay is going up, you're going to have to pay more than for existing employees. If pay is going down, you can pay less than existing employees. Usually it is the former, but there are absolutely companies right now in the declining wage situation where they are paying new hires less.

As for existing employees, most will complain if they are being paid less than new hires, but only some fraction leave. Usually bringing everyone up to the new hire pay level costs way more than the cost from backfilling positions where someone left for more pay or to give counter offers for those you want to keep from leaving.