The Decline of Annual Pay Raises in 2025

The Decline of Annual Pay Raises in 2025

In the upcoming year, many workers may find themselves disappointed with the size of their annual pay raise as the job market enters a phase of cooling off. According to a recent poll conducted by WTW, a consulting firm, the average worker is projected to receive a 4.1% pay raise for 2025, down from the 4.5% raise they received this year. This decline in pay raises is a reflection of the shifting dynamics in the labor market as companies adjust their salary budgets based on supply and demand.

Lori Wisper, WTW’s work and rewards global solutions leader, noted that the size of workers’ salary increases is primarily driven by the supply and demand of labor. Affordability and industry dynamics also play a role, although to a lesser extent. Companies participating in the survey are expected to finalize their salary budgets by April 1, 2025. The rapid growth in worker pay experienced in 2021 and 2022, fueled by a “robust” job market, is now giving way to a more subdued environment as the effects of the pandemic era begin to wane.

During the peak of the pandemic, the job market witnessed an unprecedented phenomenon known as the “great resignation,” where millions of workers voluntarily left their jobs in search of better opportunities. To attract and retain talent, companies had to offer higher salaries and incentives such as signing bonuses. However, as the job market stabilizes, the prevalence of signing bonuses has decreased, reflecting a more normalized recruitment landscape.

While the job market remains healthy, hiring, quits, and job openings have declined, leading to an increase in the unemployment rate. Companies are beginning to adjust their salary budgets to reflect the changing demand for labor. Nearly half of U.S. organizations surveyed expect their salary budgets for 2025 to be lower compared to previous years. This shift marks a return to more typical market conditions experienced prior to the pandemic.

After two years of inflation-induced declines in buying power, workers are starting to see some relief as pricing pressures ease. Despite the projected decrease in average pay raises for 2025, the 4.1% raise is still considered relatively high compared to historical norms. In the years following the 2008 financial crisis, median annual pay raises hovered around 3%, making the recent increase to over 4% notable. Salary growth, which typically stagnates or declines, saw a rare uptick during the pandemic era, marking a unique period in labor market history.

Overall, the decline in annual pay raises for 2025 reflects the shifting dynamics in the job market as companies recalibrate their compensation strategies to align with current demand for labor. While workers may see smaller raises next year, the stabilization of the market and the easing of pricing pressures offer a silver lining in terms of improved buying power and a return to more normal circumstances.

Global Finance

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