As we transition into the new year, many workers are starting to feel the effects of a cooling job market on their annual raise prospects. Recent data from a consulting firm indicates that the typical worker can expect to see a decrease in their pay raise percentage for 2025 compared to the previous year. This downward trend in pay raises can be attributed to various factors affecting the supply and demand of labor in the current job market.
Factors Influencing Pay Raise Percentages
According to industry experts, the primary driver behind the size of workers’ salary increases is the supply and demand of labor. While affordability and industry dynamics also play a role, the fluctuating job market conditions heavily influence how companies determine their annual raise budgets. The recent surge in demand for workers, fueled by the COVID-19 pandemic’s aftermath, led to a spike in salary growth in 2021 and 2022.
The phenomenon known as the “great resignation” had a significant impact on the job market during the peak of the pandemic era. More than 50 million people quit their jobs in 2022, setting a record as workers sought better-paying opportunities. To attract and retain talent, companies had to increase salaries and offer incentives like signing bonuses. However, as the job market cools and the unemployment rate rises, companies may adjust their salary budgets accordingly.
Recent data suggests that almost half of U.S. organizations are expecting lower salary budgets for 2025 as the job market returns to a more stable state. The current environment reflects a shift towards pre-pandemic conditions in terms of demand and pricing pressures. While the projected 4.1% pay raise is lower than previous years, it still remains relatively high compared to historical trends. For example, salary growth post-financial crisis had averaged around 3%, making the recent spike in raises during the pandemic era quite significant.
As we navigate the evolving landscape of the job market, it is important for workers to be aware of the changing dynamics of annual raises. While the current environment may signal a return to more normalized conditions, the impact of the great resignation and other pandemic-induced trends will continue to shape the way companies approach salary budgets and employee compensation. By staying informed and proactive, workers can better position themselves to navigate these changes and make informed decisions about their career paths.