Why you may get a smaller pay raise in 2025

By Finance News On Jul 24, 2024

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Many workers will see their annual raise shrink next year as the job market continues to cool from its torrid pace in the pandemic era.

The typical worker will get a 4.1% pay raise for 2025, down from 4.5% this year, according to a new poll by WTW, a consulting firm.

This is a midyear estimate from 1,888 U.S. organizations that use a fiscal calendar year. Actual raises may change by year-end when the companies finalize their salary budgets.

How companies decide on appropriate salaries and how to negotiate for more money

The size of workers’ salary increases is “driven primarily” by the supply and demand of labor, said Lori Wisper, WTW’s work and rewards global solutions leader. Affordability and industry dynamics play lesser roles, she added.

Companies in the survey would likely pay their annual raises by April 1, 2025, she said.

Job market was ‘unbelievably robust’

Worker pay in 2021 and 2022 grew at its fastest pace in well over a decade amid an “unbelievably robust” job market, Wisper said.

Demand for workers hit records as Covid-19 vaccines rolled out and the U.S. economy reopened broadly. Workers quit their jobs readily for better, higher-paying ones, a trend dubbed the great resignation. More than 50 million people quit in 2022, a record.

Companies had to raise salaries more than usual to compete for scarce talent and retain employees.

The prevalence of incentives like signing bonuses also “grew dramatically,” said Julia Pollak, chief economist at ZipRecruiter.

Almost 7% of online job listings offered a signing bonus in 2021, roughly double the pre-pandemic share, according to ZipRecruiter data. The percentage has dropped to 3.8% in 2024.

“I’m not sure I’ll ever see that kind of job market in my lifetime again,” Wisper said of 2021 and 2022.

Now, the job market has cooled. Hiring, quits and job openings have declined and the unemployment rate has increased.

Companies may feel they don’t need to offer as much money if they’re not getting as many applications and have fewer job openings, Pollak said.

Almost half — 47% — of U.S. organizations expect their salary budgets to be lower for 2025, according to WTW. (Companies set a salary budget and use that pool of money to pay raises to workers.)

The current environment “feels like we’re seeing more normal circumstances, where demand is back to where it was pre-pandemic in 2018 and 2019, which was still a very healthy job market,” Wisper said.

Additionally, after two years of declining buying power amid high inflation, the lessening of pricing pressures in recent months has boosted workers’ buying power.

Still high relative to recent past

While the typical 4.1% projected raise is smaller than that during the last pay cycle, it’s “still kind of high” relative to recent years, according to Wisper.

For example, the median annual pay raise had largely hovered around 3% in the…