The job market is experiencing a cooldown, which means that workers can expect smaller annual raises moving forward. Labor experts predict that U.S. companies will offer average salary increases of 4% in 2024, down from 4.4% in the previous year. A survey conducted by Willis Towers Watson shows that companies’ total salary budgets, including raises and promotions, will average at 3.8% for 2024, compared to 4.1% in the previous year.

This reduction in salary increases is not surprising given the current state of the job market. Lauren Mason, a senior principal in Mercer’s career group, believes that this trend will continue but the extent of the decline remains uncertain. However, it is worth noting that the projected salary increases are still relatively generous in comparison to the raises that followed the 2008 financial crisis, which averaged around 3% annually.

According to experts, the primary driver behind companies’ decisions regarding raises is the supply and demand of labor. In the spring of 2021, as the U.S. economy reopened after the pandemic-induced slump, the demand for labor skyrocketed, while the labor supply remained limited. This led to a competitive job market, with companies offering higher wages to attract and retain talent.

During this period, known as the “great resignation,” workers had the luxury of easily quitting their jobs and finding new ones with significantly higher pay. Companies recognized the need to offer more generous raises to existing employees in order to retain them. However, this exceptional labor market is unlikely to be repeated, and workers should not expect similar circumstances in the future.

The current job market has cooled down from its rapid pace in 2021 and 2022. Despite this, data suggests that it remains strong compared to pre-pandemic norms. When deciding how to boost pay, companies must strike a balance between two competing priorities. They need to be conservative enough to avoid overspending and potential layoffs, while also being generous enough to maintain competitiveness and retain their employees.

The cautious approach to pay increases has already been observed in the technology sector. In 2022 and 2023, several major technology firms announced mass layoffs, which reflected a reversal of the excessive hiring that occurred during the early stages of the Covid-19 pandemic. It is rare for companies to consistently increase average raises, making the breach of 4% in 2022 noteworthy. For multinational companies, even a 1% increase in average raises represents a significant financial impact.

It is important to remember that before the 2008 financial crisis, annual raises often exceeded 4%, and in some cases even reached 5%. However, these numbers declined following the economic downturn. Therefore, it is crucial to consider the potential effects of future economic fluctuations on salary increases.

Workers should anticipate smaller annual raises in the coming years due to a cooler job market. Companies are striving to strike a balance between maintaining competitiveness and managing their budgets effectively. While the current forecasted salary increases are still relatively favorable, they are likely to be much lower than the exceptional raises witnessed during the “great resignation” period. Ultimately, the future of salary increases depends on the ever-changing dynamics of the labor market and economic conditions.

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