As the job market cools off from the rapid pace seen during the pandemic era, many workers are facing the reality of smaller annual raises. A recent poll by WTW, a consulting firm, indicates that the typical worker can expect a 4.1% pay raise for 2025, a decrease from the 4.5% raise seen this year. The factors influencing the size of these salary increases are primarily driven by the supply and demand of labor, with affordability and industry dynamics playing secondary roles.
The job market saw unprecedented growth in 2021 and 2022, with workers experiencing the fastest pace of pay raises in well over a decade. This period was marked by a surge in demand for labor as Covid-19 vaccines became widely available and the economy reopened. The phenomenon known as the great resignation saw more than 50 million workers quitting their jobs in 2022, leading to increased competition among companies to attract and retain talent. Salary growth during this time outpaced previous years, with companies offering incentives like signing bonuses to entice workers.
However, the job market has since cooled off, with hiring, quits, and job openings declining while the unemployment rate has increased. This shift has led many companies to reevaluate their salary budgets, with 47% of U.S. organizations expecting lower budgets for 2025 according to WTW. The current environment is seen as a return to more normal circumstances, reminiscent of the job market pre-pandemic in 2018 and 2019. Despite the slight decrease in projected pay raises, the 4.1% figure is still considered high relative to previous years, where annual raises hovered around 3%.
The pandemic era saw a unique shift in salary growth trends, with the increase to more than 4% standing out in comparison to the years following the 2008 financial crisis. Prior to the crisis, salary growth tended to fall instead of rise, with figures averaging around 4.5% to 5%. The remarkable increase in pay raises during the pandemic era represents a departure from historical norms that have yet to be fully understood by economists. The current state of the job market presents a new challenge for both employers and employees as they navigate these uncertain times.
The future of annual raises remains uncertain as the job market continues to evolve. While workers may see a slight decrease in pay raises for 2025, the overall landscape of the labor market suggests a return to more normal conditions. It is important for both companies and workers to adapt to these changes and explore innovative solutions to address the challenges posed by the shifting dynamics of the job market.