The anticipated annual raise for workers in 2025 is set to decrease to 4.1%, a drop from the 4.5% seen this year. This change is primarily attributed to the dynamics of the supply and demand of labor, with affordability and industry-specific conditions playing secondary roles. The survey conducted by WTW, a consulting firm, with data from 1,888 U.S. organizations following a fiscal calendar year, suggests that the finalized salary budgets might vary by year-end.
The years 2021 and 2022 witnessed significant growth in worker pay, marking a period of rapid salary escalation that had not been observed for well over a decade. Factors such as the widespread availability of Covid-19 vaccines, along with the reopening of the U.S. economy, led to record-high demand for workers. This surge in demand prompted an unprecedented number of individuals to quit their jobs in pursuit of better opportunities, fueling what has been termed as the great resignation.
The trend seen during the pandemic era, characterized by companies offering higher salaries and incentives to attract and retain talent, is now undergoing a reversal. With a decline in hiring, quits, and job openings, accompanied by an increase in the unemployment rate, companies are adjusting their salary budgets accordingly. Nearly half of U.S. organizations are expecting a reduction in their 2025 salary budgets, signaling a return to more normalized market conditions resembling the pre-pandemic years of 2018 and 2019.
The moderation of pricing pressures in recent months has provided a boost to workers’ purchasing power, following a period of declining buying power amid high inflation. Although the projected 4.1% raise for 2025 is lower compared to the previous cycle, it still stands out as relatively high in comparison to the years preceding the pandemic. In the aftermath of the 2008 financial crisis, the median annual pay raise had stagnated around 3%, making the increase to over 4% during the pandemic era a notable deviation from the norm.
The fluctuations in salary growth rates observed in recent years, particularly during the pandemic, have defied historical trends. Traditionally, salary growth tends to decrease rather than increase over time. However, the substantial rise in annual raises during the pandemic era, surpassing rates seen in the years leading up to the financial crisis, represents a unique phenomenon in the job market. The implications of these shifts may have far-reaching consequences on how companies approach compensation and retention strategies in the future.