Why there could be a decline next year

Workers across the U.S. may need to brace themselves for a change in their annual pay raises. A new report suggests pay increases could be smaller in the coming year. The trend is being fueled by a cooling labor market and changing economic prospects. Pay increases surged in the early post-pandemic years, when workers were in high demand. But the momentum is now favoring employers. The question is how this will affect workers, especially their wage demands.

Declining wage increases in a cooling market

The days of record-breaking job offers and the “Great Resignation” appear to be behind us. A new survey from consulting firm WTW predicts the typical worker can expect a 4.1% raise in 2025, up from 4.5% this year. Based on data from 1,888 U.S. organizations, the forecast signals a gradual cooling of the labor market after the pandemic-era peak.

Wage increases are largely driven by labor supply and demand, so they reached new heights in the early post-pandemic period. Millions of American workers changed jobs in search of better pay. The labor market boomed in 2021 and 2022. There were more job openings than workers, causing a hiring spree and record-high turnover. During that time, companies had to raise wages to compete for scarce talent and retain workers.

Now things are changing. Hiring has slowed, turnover has fallen, and job openings have fallen. In April 2024, according to the U.S. Bureau of Labor Statistics, job openings fell to their lowest level in more than three years. There were about 1.2 job openings for every unemployed person, down from a ratio of 2:1 about two years ago.

This cooling trend is reflected in companies’ plans for 2025. Nearly half (47%) of U.S. organizations expect their payroll budgets to be lower in the coming year. Given the competitive job market, companies believe they can pay less. They are receiving fewer applications and fewer job offers.

How do today’s increases compare to previous ones?

The 4.1% increase for 2025 is smaller than in recent years. But it’s a decent return compared to the median increase of 3% after the 2008 financial crisis.

The jump to more than 4% during the pandemic was notable. Wage growth tends to fall, not rise, during economic shocks. For example, pay rises ranged from 4.5% to 5% before the 2008 crisis. They never fully recovered until the recent boom.

Why employees should expect a net profit despite reduced wages

Interestingly, workers’ purchasing power has improved over the past year. Wage increases may be smaller, but the reason is an increase in purchasing power. This unexpected result is due to an easing of inflationary pressures that had previously dampened wage growth.

Real hourly earnings, which measure wage growth after taking into account inflation, have been positive since May 2023. That means the average worker’s salary today buys more than it did a year ago. Between May 2023 and May 2024, real hourly earnings rose by 0.8% for the average private-sector worker.

The trend is strong for non-management workers, whose pay has risen more than 25% to $30 an hour, a significant change from the period between April 2021 and April 2023. During that time, high inflation outpaced wage growth, leading to falling real wages.

Many workers would be thrilled by this increase in purchasing power. It means they can buy more while working the same number of hours. They may also choose to take on fewer jobs.

Get ready for a salary increase in 2025.

As a job seeker, the 2025 market may be more challenging than in recent years. You need to adjust your expectations and strategies. Here are some tips to consider:

1. Raising qualifications and retraining: The job market is evolving rapidly. Invest in yourself by acquiring new skills or developing existing ones. Start by analyzing the skills gaps in your field. For example, learn how to use AI tools in your field. Show how you can use them to increase productivity and drive innovation.
2. Document your achievements: Keep a detailed record of your accomplishments. Use a tool like Evernote or a spreadsheet to track your wins, daily, weekly, or monthly. Quantify your accomplishments wherever possible. This documentation will provide concrete evidence of your worth when it comes time to negotiate.
3. Understand your company’s pay structure: Understand how your organization handles pay increases and other compensation options. If there is a pay-for-performance or short-term incentive program, make sure you know how to maximize your payout.
4. Be an exceptional employee: It may sound simple. But being a reliable, positive team member who goes the extra mile can set you up for long-term success. Companies are more likely to reward employees they value and enjoy working with.

How Companies Can Manage Salary Expectations Next Year

With forecasted wage increases set to remain moderate, companies need to take a strategic approach to employee compensation.

• Make data-driven decisions: Relying on outdated salary information won’t cut it in 2025. As an employer, you need to compare salaries regularly. Use industry-specific, regional salary guides to help you align your salary with the current market.
• Embrace transparency: Gone are the days of having to budget for a role. Be honest about your salary range from the get-go. When discussing roles with candidates, provide clear salary ranges. This approach saves both parties time and builds trust.
• Showcase your total value proposition: Compensation is just one piece of the puzzle. Be clear about your company’s comprehensive benefits package when negotiating with candidates. This could include flexible work, good health insurance, a strong 401(k) match, or perks like sabbaticals and mental health days. Tailor your offer to each candidate’s priorities. For some, work-life balance may be more important than a higher salary.
• Invest in employee development: By 2025, the most attractive employers will be those who actively invest in the future of their employees. Show your commitment to professional development. Create clear paths to advancement. Fund appropriate certifications. Give employees the chance to develop their skills. Position your company as a launchpad for career development, not just a paycheck.

As we approach 2025, the key for both employees and employers will be the ability to adapt. While wage increases may be lower, they remain solid compared to historical standards. Combined with increased purchasing power, the overall picture for employees remains positive. Employers must balance cost control with competitive pay to attract top talent. The job market is cooling but still strong.