Pay Raises Expected to Slow in 2025 as Labor Market Cools
As the white-hot labor market of the past few years shows signs of cooling down, pay raises for U.S. workers in 2025 are projected to be slower than recent trends. Still, most employers will give salary bumps above the 3% threshold that has become the norm in the pre-pandemic economy.
Latest Forecasts Slightly Lower Than Prior Years
According to the latest data from compensation consulting firms and salary specialists, average pay raises next year will range from 3.5% to 3.9%. Though below the actual 4% increase in 2023 salaries and 2022’s 3.6%, that still exceeds historical averages.
A summer survey by Payscale, released in August, found that managers foresee boosting pay by 3.5% next year based on economic uncertainty and easing hiring challenges. Two-thirds expect flat budgets compared to 2024, while 19% anticipate increases and 15% decreases.
A similar poll by WTW of around 32,000 organizations projected 2025 salary budgets growing 3.9%, down almost 2 percentage points from 2023 estimates. Empsight's preliminary figures point to median merit hikes of 3.5%.
Slowing Turnover Among Factors
Experts attribute the slightly slower projected wage growth to various factors, especially a cooling economy after historic levels of resignations and turnover. WTW’s research showed 38% of employers struggling to attract and retain workers now versus 57% two years ago, a nearly 20-point drop.
Yet while labor market pressures may be easing overall, they remain intense in some industries where talent is scarce. Payscale determined the biggest raises on tap for 2025 will be in government and engineering/science jobs, averaging 4.5% and 4.2% respectively.
Conversely, increases in retail, customer service and education will likely stay below 3.1%. But regardless of differences between sectors, stiff competition means employers without clear compensation strategies risk losing top staff during upcoming budget cycles.
Inflation Outpacing Pay Gains
Despite substantial salary increases in recent years, many employees feel like they’re treading water as steep consumer prices undermine their purchasing power. One survey this year found over half of workers believed their pay lagged behind inflation.
An analysis by Payscale tracked a 33% cumulative rise in U.S. wages since 2006. However, after accounting for inflation, it turned out that real incomes declined by 12.6% over that period. Essentially, workers’ current paychecks buy less than what they did 15 years ago.
The pressure on household finances persists even as overall price growth shows some signs of easing. After the exceptionally volatile pandemic economy pushed inflation to historic highs last year, it has cooled slightly but remains well above the Federal Reserve’s 2% target.
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Pay Raises Expected to Slow in 2025 as Labor Market Cools
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