Why you may get a smaller pay increase in 2025

Many workers will see their annual pay increases shrink next year as the labor market continues to cool from the torrid pace of the pandemic era.

The average worker will get a 4.1% pay increase in 2025, up from 4.5% this year, according to a new report. poll by WTW, a consultancy firm.

This is a mid-year estimate from 1,888 U.S. organizations that use a fiscal calendar year. Actual increases could change towards the end of the year as companies finalize their salary budgets.

The size of employee pay increases will be “primarily determined” by labor supply and demand, said Lori Wisper, WTW’s employment and compensation leader. Affordability and industry dynamics play a smaller role, she added.

Companies in the study would likely pay their annual pay increases before April 1, 2025, she said.

Workers’ wages grew at the fastest pace in more than a decade in 2021 and 2022 amid an “incredibly robust” labor market, Wisper said.

Demand for workers hit records as Covid-19 vaccines rolled out and the US economy largely reopened. Workers were readily quitting their jobs for better, higher-paying jobs, a trend sometimes called the Great Layoff. In 2022, more than 50 million people quit, a record.

Companies had to increase salaries more than normal to compete to retain scarce talent and employees.

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

According to data from ZipRecruiter, nearly 7% of online job postings offered a signing bonus in 2021, about double the share before the pandemic. The percentage has fallen to 3.8% in 2024.

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

More from Personal Finance:
CFPB is cracking down on popular payroll advance programs
Why employees are less interested in work
Why a job is ‘becoming more attractive’ to teenagers

Now the labor market has cooled down. Hiring, firing and vacancies have decreased and the unemployment rate has increased.

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

According to WTW, nearly half (47%) of U.S. organizations expect their payroll budgets to be lower by 2025. (Companies set a salary budget and use that money to pay raises to employees.)

The current environment “feels like we’re seeing more normal conditions, with demand returning to pre-pandemic levels in 2018 and 2019, which was still a very healthy labor market,” Wisper said.

Moreover, after two years of declining purchasing power amid high inflation, the easing of price pressures in recent months has increased workers’ purchasing power.

While the typical expected pay increase of 4.1% is smaller than the last pay cycle, Wisper said it is “still quite high” compared to recent years.

For example, the average annual wage increase in the years following the 2008 financial crisis largely hovered around 3%, she said.

The increase to more than 4% during the pandemic era was notable: salary growth tends to fall rather than rise, Wisper said. For example, in the years leading up to the financial crisis it was around 4.5% to 5%, and had never fully recovered, she said.

It’s “something that’s never happened before,” Wisper said. “And [the raises] have stuck to some extent.”