As the job market transitions from the rapid pace seen during the pandemic era, many workers are expected to experience a reduction in their annual raises for the upcoming year. According to a recent survey conducted by WTW, a consulting firm, the average worker is projected to receive a 4.1% pay raise in 2025, down from the 4.5% increase observed this year. The findings are based on an estimate from 1,888 U.S. organizations that operate on a fiscal calendar year, with the possibility of changes in actual raises by the end of the year as companies finalize their salary budgets.
The size of the annual pay raises is primarily influenced by the supply and demand of labor in the market, as stated by Lori Wisper, WTW’s work and rewards global solutions leader. While affordability and industry dynamics also play a role, the current trend in the job market focuses on the availability of talent and the competition among companies to attract and retain employees. The job market saw significant growth in worker pay during 2021 and 2022, which followed a period of increased demand as the economy reopened and Covid-19 vaccines became widely available.
During the peak job market conditions of 2021 and 2022, the phenomenon known as the “great resignation” emerged, with millions of workers voluntarily leaving their jobs in pursuit of better opportunities and higher pay. Employers responded by offering competitive salaries and incentives, such as signing bonuses, to attract candidates. The prevalence of signing bonuses in job listings doubled during the early stages of the pandemic but has since decreased in recent years. The job market dynamics have shifted as hiring, quits, and job openings have declined, resulting in companies adjusting their salary budgets for 2025.
As the job market cools down and returns to more typical circumstances, companies are readjusting their salary budgets to align with pre-pandemic levels. Nearly half of U.S. organizations anticipate lower salary budgets for the upcoming year, reflecting a shift towards a more balanced supply and demand equilibrium. The recent decline in inflationary pressures has also contributed to an improvement in workers’ buying power, despite the projected decrease in annual pay raises for 2025.
When comparing the current average raise of 4.1% to the historical trends observed in past years, it is evident that the job market has undergone significant fluctuations. Following the financial crisis of 2008, the median annual pay raise remained around 3%, with a gradual increase to over 4% during the pandemic era. This upward trajectory in salary growth is unprecedented, as past trends indicated a gradual decrease in annual raises leading up to economic downturns. The unique circumstances of the pandemic have disrupted traditional patterns in salary growth, creating a new normal in the job market.
The cooling job market is expected to have a direct impact on annual raises for workers in 2025. While the projected decrease in pay raises may signal a return to more stable market conditions, the long-term implications of these changes remain to be seen. As companies adjust their salary budgets and competition for talent evolves, workers are likely to experience a shift in the dynamics of compensation and benefits in the coming years.