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As the labor market continues to cool from its pandemic-era red hotness, many workers will likely see smaller annual pay raises next year.
A new poll from consulting firm WTW finds that the typical worker’s pay rise is expected to fall to 4.1% in 2025, down from 4.5% this year.
This is a midpoint estimate from 1,888 U.S. organizations that use the fiscal calendar. Actual pay increases may change by the end of the year, when companies finalize their pay budgets.
Worker pay increases will be “primarily” driven by labor supply and demand, said Lori Wisper, global solutions leader for labor and compensation at WTW, with affordable wages and industry trends playing a lesser role, she added.
The companies surveyed are likely to pay annual salary increases up until April 1, 2025, she said.
Job market is ‘incredibly strong’
Wisper said workers’ wages in 2021 and 2022 grew at the fastest pace in more than a decade amid an “incredibly robust” job market.
As COVID-19 vaccines roll out and the U.S. economy broadly reopens, demand for workers is at record highs. Workers are willing to leave their jobs for better, higher-paying jobs, a trend dubbed the “Great Retirement.” More than 50 million people left their jobs in 2022, the highest number ever.
Companies have had to raise wages above normal levels to attract scarce talent and retain employees.
The prevalence of incentives such as signing on bonuses has also “increased dramatically,” said Julia Pollack, chief economist at ZipRecruiter.
About 7% of online job ads offered a signing bonus in 2021, nearly double the number before the pandemic, according to ZipRecruiter data. That percentage is falling to 3.8% in 2024.
“I don’t know if we’ll see a job market like this again in my lifetime,” Whisper said of 2021 and 2022.
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The job market is currently in a slump. Hiring, quitting, and job openings are down, and the unemployment rate is rising.
Pollack said that when there are few applicants and fewer job openings, companies may not feel they need to pay as much.
According to WTW, nearly half (47%) of U.S. organizations expect their salary budgets to decrease in 2025. (Businesses set salary budgets and use those funds to pay employee raises.)
Wisper said the current environment “feels like we’re getting back to more of a normal situation with demand returning to levels seen in 2018 and 2019, pre-pandemic, when we still had a very healthy job market.”
Moreover, after two years of high inflation eroding purchasing power, easing price pressures in recent months have increased workers’ purchasing power.
Still high compared to recent years
Whisper said the typical 4.1% salary increase forecast is smaller than in the last pay cycle, but “it’s still pretty high” compared to recent years.
For example, in the years following the 2008 financial crisis, median annual salary increases generally hovered around 3 percent, she said.
The pandemic-era increase of more than 4% is notable. Wisper said salary growth tends to go down, not up. For example, it was around 4.5% to 5% in the years leading up to the financial crisis and has never fully recovered, she said.
“This has never been done before,” Whisper said. “And [the raises] To some extent, I am sticking with it.”
