Next year, you might be getting your biggest raise in more than a decade.
Thanks to a tight labor market, salary budgets for workers are expected to grow 4.1% on average, according to the latest annual salary report from consulting firm Willis Towers Watson. Next year’s planned pay increases would be the highest on record since 2008.
Almost two-thirds of employers plan to award raises in 2023 that are larger than last year, Willis Towers Watson found in a survey of more than 1,400 U.S. companies conducted in April and May.
Most employers reported that the pay increases are in direct response to the labor market, which has seen a turbulent couple of years. Early in the pandemic, layoffs were rampant, shooting the unemployment rate to a peak of 14.7% in April 2020.
Now, jobs are plentiful, and nearly all employers in the survey said they’ve been experiencing trouble hiring and retaining workers throughout the year. Federal data bears this out: For most of 2022, the unemployment rate has been below 4%, with job openings outnumbering available workers nearly 2 to 1.
Aside from higher salaries, employers are scrambling to offer better perks to attract new workers and keep their current ones happy. About 7 in 10 employers said they have increased their workplace flexibility — such as allowing remote work or more lenient schedules — and roughly half reported that they’re beefing up their sign-on bonuses as well as long-term incentives.
Will raises keep pace with inflation?
Inflation is the elephant in the room. While the slated raises for next year are historically high, on average, they don’t come close to matching the scorching inflation rate.
In June, the year-over-year inflation rate hit 9.1%, according to the U.S. Labor Department's most recent numbers, marking yet another four-decade high. The skyrocketing cost of everyday items is quickly making its way into salary discussions all around the country.
Still, for the overall workforce, wage gains have been consistently lagging behind inflation, which means that many workers are losing buying power right now despite getting paid more money. According to the Labor Department, “real wages,” which are adjusted for inflation, fell 3.6% in June.
With Willis Towers Watson's figures, it’s important to keep in mind that the 4.1% increase to company budgets for salaries doesn’t necessarily mean each individual employee’s salary will jump 4.1%.
For in-demand roles especially, the raise an individual gets could be much higher. And some could be less, of course.
“I'm actually fine with that 4.1% figure,” says Dean Baker, senior economist and co-founder of the Center for Economic and Policy Research, a left-leaning think tank. “It means that we don't have to worry about a wage-price spiral, with inflation getting ever higher.”
Wage-price spirals occur when rising wages increase demand for goods and services, thus driving prices up even further. Given that huge swaths of Americans are already reporting that inflation is impacting their finances, making it hard for some to afford basic necessities, it's a scenario Baker and other experts would like to see the U.S. avoid.
Another consideration is that the Federal Reserve, the central banking system tasked with curbing inflation, is watching wage growth closely. If wages grow too fast, the Fed may increase interest rates more aggressively — a move that could send the overall economy into a recession with high unemployment rates.
With salaries increasing by 4.1%, that scenario would be unlikely. Baker says it’s also improbable that inflation will remain as high as it has been for the long term.
He adds that most of the factors driving inflation are "one-time issues" on track to be reversed. The perfect example of this is gas prices, which are weighted heavily in the inflation calculations and have already started falling sharply from their peaks earlier this year.
“To my mind, the most important thing is to keep the economy growing and the unemployment rate low,” Baker says. “If that happens and rates of inflation fall back to more normal levels, workers will be doing just fine with a 4.1% pay increase.”