As inflation cools, employee pay raises are on the decline

If you could turn back time.

In the summer of 2022, the unemployment rate was 3.5% and workers were in the driver's seat, demanding higher salaries, greater growth and promotion prospects, and more desirable benefits .

And it worked. Employers in the tight job market were eager to recruit and retain workers. Base pay increases in 2023 averaged 4.8%, the highest level in two decades, according to Payscale.

Alas, the salad days of steep raises appear to be behind us. Fewer employers plan to bump up salaries next year, signing bonuses are hard to come by, job switchers aren’t feeling the love, and employers continue to push back against pay transparency despite new laws requiring it in more states.

Next year, employers expect to hand out raises of 3.5%, down from 3.6% on average in 2024, per Payscale’s Salary Budget Survey .

“The biggest things that impact pay increase budgets are economic conditions and the competition for labor,” Amy Stewart, Payscale’s principal for research, told Yahoo Finance. “Annual inflation has fallen since its height in 2022. It is now below 3%. Pay increases went up in 2023 and 2024 to account for higher inflation. Pay was lower last year than the year before, and it's dropping again going into 2025.”

Another key factor: In July, the unemployment rate was 4.3%. And although 4 in 10 employers say they’re having trouble attracting and retaining talent this year, that’s far below the nearly 6 in 10 from two years ago, according to a recent salary report by WTW.

Among the nearly 1,900 US companies polled in the second quarter, nearly half said they had cut their budgets for salary bumps this year, lowering the median raise to 4.1%. And they plan to dole out even less next year, projecting a median raise of 3.9% in 2025.

Pay varies depending on what field you work in, of course. For example, employees in science, engineering, and government will experience salary bumps over 4%, per the Payscale data. Folks who work in retail, customer service, and education will see smaller increases of just 3.1%.

“It looks like most companies out there are expecting to raise wages by about 3.5% next year,” Julia Pollak, chief economist at ZipRecruiter, the employment search site, told Yahoo Finance. “That's above inflation, and given the slackening in the labor market that is pretty much all workers will expect to get.”

This isn’t going to go down well. More workers are already unhappy with their salaries. “Satisfaction with wage compensation, non-wage benefits, and promotion opportunities all deteriorated compared to a year ago,” according to a new survey by the New York Federal Reserve. These declines were largest for women, respondents without a college degree, and those with annual household incomes less than $60,000.

“There is a sense that some bargaining power has shifted from workers back to employers,” Pollak added. “Workers are realizing they have a bit less leverage now.”

The upside: Although annual raises are shrinking, more people are likely to get one — 85% of employees will receive a base pay bump this year, according to Stewart.

Job switching isn’t a sure payoff

One way to pump up your salary has been to jump jobs, and that was never more apparent than in the last few years. But in today’s job market, not as many switchers are getting that sweet payoff.

In the second quarter, fewer than 6 in 10 job switchers landed a bigger paycheck than they had at their former employer, according to a survey of recent hires by ZipRecruiter. In the fourth quarter of 2023, 70% did.

Only 14% of new hires said they received a signing bonus upon hire, down from 23% in the first quarter, according to the report.

“We're seeing a massive decline in the share of employers offering signing bonuses and a big shift toward longer-term retention strategies,” Pollak said. “The share of postings mentioning health insurance benefits, retirement benefits, and productivity-related bonuses keep going up.”

And for those job jumpers who really didn’t want to part ways with their old boss, only 16% said they received a counter-offer from their former firm, down from 24% in the first quarter.

Meanwhile, among new hires who are negotiating pay before accepting an offer, fewer are succeeding.

“In our previous surveys of new hires, everyone who negotiated — almost 94% — were getting some improvement in their offer when they negotiated,” Pollak said. “Now that's down to about 85%.”

What’s behind the pushback? Cooling inflation, which eases the pressure on employers to increase wages.

“We expect this dynamic to continue into next year reflecting the broader economic conditions characterized by slowing inflation and moderated job creation,” Tom Bowen, an economist at Gusto , a payroll and benefits software provider, told Yahoo Finance.

New workers are bearing the brunt of it. Pay for newly hired workers is 7% lower this year than the peak in 2022, Bowen said.

Remote working is here to stay

While there is much ado about bringing employees back into the office and fewer firms are hiring remote workers, for employers who are anxious to hire, it’s still a lure.

Mentions in job postings of remote work have declined since peaking in 2022, Pollak said, but they're still much higher than before the pandemic. “If you mention that the job is remote in the job title, you get about five times as many applications per posting,” she said.

For employers looking to shrink their payroll, it’s worth noting that people are prepared to take a pay cut to work remotely. “Employers feel less wage growth pressure when they give workers flexibility, which they value equivalent to an eight to 10% pay raise,” Pollak said.

Pay transparency is still not quite there

Employers remain reluctant to divulge pay ranges, especially as they try to cut costs and reset pay lower for new hires, Pollak told me.

Roughly 20% to 30% of employers provide pay information in the absence of a pay transparency law, and that jumps to about 50% to 60% after the passage of a state or city pay transparency law, she said.

There isn't quite enough data yet, however, to know what the effect those laws have on pay. “Likely it has narrowed gender gaps and racial gaps, but also possibly slowed overall wage growth,” Pollak added.

If you don’t ask, you don’t get it

Feeling blue about pay? Take a breath. You can still give it a go and ask for a pay increase.

“My advice to workers is don’t get hung up on the budget averages, especially if you are dissatisfied with your pay,” Stewart said.

“For one thing," she said, “we are seeing higher pay increases planned for skilled sectors like engineering and science, as well as for government employees. For another, individual employees can be entitled to higher pay increases that are budgeted for outside of annual company-wide increase averages.”

Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist, and the author of 14 books, including " In Control at 50+: How to Succeed in The New World of Work" @kerryhannon .

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