As inflation falls, wage increases fall

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 opportunities for growth and advancement, and more attractive benefits..

And it worked. Employers in the tight labor market were eager to hire and retain workers. According to Payscale, base salary increases in 2023 averaged 4.8%, the highest in two decades.

Unfortunately, the golden days of steep pay raises seem to be behind us. Fewer and fewer employers are planning pay raises next year, signing bonuses are hard to come by, job changers are uncomfortable, and employers continue to resist pay transparency, even though new laws in more and more states require it.

Next year, employers expect to pay salary increases of 3.5%, compared to an average of 3.6% in 2024, according to Payscale's salary budget survey.

“The biggest factors affecting raise budgets are economic conditions and competition for labor,” Amy Stewart, head of research at Payscale, told Yahoo Finance. “Annual inflation has declined since its peak in 2022. It is now below 3%. Raises have been increased in 2023 and 2024 to reflect higher inflation. Salaries were lower last year than the year before and will decline again in 2025.”

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

Nearly half of the nearly 1,900 U.S. companies surveyed in the second quarter said they had cut their budget for raises this year, bringing the average raise down to 4.1 percent. And they plan to pay even less next year, forecasting an average raise of 3.9 percent for 2025.

Of course, pay depends on what field you work in. For example, according to Payscale data, employees in science, engineering, and government can see pay increases of over 4%. For employees in retail, customer service, and education, increases are smaller at just 3.1%.

“It looks like most companies are expecting pay increases of about 3.5 percent next year,” Julia Pollak, chief economist at job search site ZipRecruiter, told Yahoo Finance. “That's above the rate of inflation, and given the slowdown in the labor market, that's pretty much all workers are expecting.”

That will not go down well. More and more employees are already dissatisfied with their salaries. “Satisfaction with pay, benefits and opportunities for advancement has worsened compared to last year,” says a new survey by the New York Federal Reserve. These declines were most pronounced among women, respondents without a college degree and those with an annual household income of less than $60,000.

The story continues

“There is a feeling that some of the bargaining power has shifted from workers back to employers,” Pollak added. “Workers realize they have a little less influence now.”

The bright side: Even though annual pay raises are declining, more people are likely to get them — 85% of workers will get a raise in their base salary this year, Stewart said.

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Changing jobs doesn’t necessarily pay off

One way to boost your salary is to switch jobs. This has been more obvious than ever in recent years. But in today's job market, not as many job changers get this sweet reward.

According to a ZipRecruiter survey of new hires, fewer than 6 in 10 job switchers earned more than they did at their previous employer in the second quarter, compared to 70% in the fourth quarter of 2023.

According to the report, only 14 percent of new hires said they received a signing bonus when they were hired, compared to 23 percent in the first quarter.

“We are seeing a massive decline in the share of employers offering signing bonuses and a strong shift toward longer-term retention strategies,” Pollak said. “The share of articles mentioning health insurance benefits, retirement benefits and productivity-related bonuses continues to rise.”

And of those job changers who really did not want to part with their old boss, only 16% said they had received a counter offer from their former employer; in the first quarter, the figure was only 24%.

At the same time, new employees are becoming less and less successful at negotiating their salary before accepting an offer.

“In our previous surveys of new employees, nearly 94% of respondents who negotiated got an improvement in their offer,” Pollak said. “Now that number is about 85%.”

What is behind this resistance? Falling inflation, which reduces the pressure on employers to raise wages.

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

New workers are bearing the brunt of the burden. Wages for newly hired workers are 7% lower this year than at their peak in 2022, Bowen said.

Teleworking will remain

While there is a lot of talk about bringing employees back to the office and fewer companies are hiring remote workers, it is still an incentive for employers who are keen to hire new employees.

Pollak said mentions of remote work in job postings have declined since their peak in 2022, but they are still much higher than they were before the pandemic. “If you mention in the job title that it's a remote job, you'll get about five times as many applications per job posting,” she said.

For employers looking to reduce payroll costs, it's important to know that people are willing to accept pay cuts when working from home. “Employers feel less pressure to raise wages when they give their employees flexibility, which they equate to an eight to 10 percent raise,” Pollak said.

Wage transparency is not yet fully achieved

Employers remain cautious about salary pricing, especially as they try to cut costs and set lower salaries for new hires, Pollak told me.

About 20 to 30 percent of employers disclose information about their salaries when there is no wage transparency law. After a wage transparency law is passed at the state or city level, that proportion rises to about 50 to 60 percent, she said.

However, there is not yet enough data to know what effect these laws have on wages. “They have probably narrowed gender and racial gaps, but may also have slowed overall wage growth,” Pollak added.

If you don’t ask, you won’t get anything

Feeling depressed about your salary? Take a deep breath. You can still try and ask for a raise.

“My advice to workers is don't let average budgets hold you back, especially if you're unhappy with your salary,” Stewart said.

“For one thing,” she said, “higher pay increases are planned for skilled industries such as engineering and science, as well as for government employees. For another, individual workers may be eligible for higher pay increases that fall outside of the average annual pay increases for the entire company.”

Kerry Hannon is a senior columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, includingEverything under control at 50+: How to succeed in the new world of work” and “Never too old to get rich.” Follow her on X @kerryhannon.

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