Pay Won't Rise Much Despite Low Unemployment, Researchers Say

In lieu of big raises, employers could offer improved benefits, flexibility and career opportunities

Stephen Miller, CEBS By Stephen Miller, CEBS January 17, 2019
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updated January 24, 2019

Employers may not feel pressured to significantly hike wages despite record low unemployment, say Federal Reserve Bank researchers.

By the end of 2018, the U.S. unemployment rate was just under 4 percent, its lowest level since 1969. "Could such an ostensibly tight labor market lead to a sharp pickup in wage growth from its recent moderate pace?" wrote Sylvain Leduc, Chitra Marti and Daniel Wilson of the Federal Reserve Bank of San Francisco in a new study.

Their analysis, published in the Federal Reserve Bank of San Francisco's January Economics Letter, looks at the relationship between wage growth and unemployment, using multiyear state-level data.

The key takeaway: For a given drop in joblessness, wages will increase by about the same percentage, regardless of how low the unemployment rate is. So even when unemployment falls to record-low levels, wages continue to rise only gradually.

"We do not foresee a sharp pickup in wage growth nationally if the labor market continues to tighten as many anticipate," the researchers wrote.

The unemployment rate was 3.9 percent in December 2018, down from 4.1 percent a year earlier. The consumer price index for urban consumers, meanwhile, rose just 1.9 percent in 2018. In 2017, it rose 2.1 percent.

Low inflation puts less pressure on employers to raise hourly wages and salaries, and technological advancements are among the factors that are helping to keep inflation in check.

2018 Pay Increases Restrained

After several years of pay increases below 3 percent on average, pay levels for nonfarm hourly workers increased by 3.2 percent in 2018, as December data from the Bureau of Labor Statistics revealed. In 2017, hourly workers saw a wage gain of 2.5 percent.

ADP Research Institute's latest Workforce Vitality Report, released in January, found that wages for U.S. workers grew 3.4 percent year-over-year through December 2018, increasing the average wage level by $0.93 (to a $28.06 average hourly wage). The report is derived each month from a sample of approximately 250,000 companies and 18 million employees. Wage growth was driven by strong wage gains for workers in the education and health services industry, representing 19 percent of the workforce, which saw 4.1 percent wage growth (to $27.05 an hour). Businesses with less than 50 employees experienced the slowest wage growth at 2 percent (to $26.06).

By U.S. regions, ADP found that average hourly wage growth in 2018 was as follows:

  • The Northeast—3.7 percent (to $31.57).
  • The West—3.7 percent (to $30.21).
  • The South—3.0 percent (to $26.24).
  • The Midwest—3.4 percent (to $26.01).

Real wages fell by 1.3 percent in 2018 when wage growth was measured in relation to inflation, according to the Q4 2018 Index report by PayScale, a provider of compensation data and software. Since 2006, wages have risen 14 percent overall in the U.S. but―when inflation is factored in―real wages have actually fallen 9 percent, PayScale reported, based on the firm's database of over 35 million employee profiles.

"There is no question this is a turbulent period for the U.S. economy, which means uncertain wage growth across many jobs and industries as well as a continual decline in real wages for most workers," said Katie Bardaro, chief economist at PayScale. "Technology jobs—along with cities which have a heavy emphasis on technology—are some of the few, consistent winners when it comes to increasing wages in these volatile times."

2019 Pay Projections

For salaried employees, data released in mid-December by HR consultancy Mercer show that employers anticipate U.S. private-sector salaries for 2019, including merit and promotion-related pay increases, to rise by 3.4 percent over 2018 pay, according to the consultancy's compensation database, which reflects pay practices for more than 16 million employees. In 2018, salary budgets grew on average by 3.1 percent, Mercer reported.

In January, HR consultancy Korn Ferry forecast that workers in the U.S. will see average salary growth of 3 percent in 2019―essentially the same as last year and the year before―based on data for more than 25,000 organizations. Adjusted for an expected 2.4 percent inflation rate in 2019, the real wage increase would be 0.6 percent, down from last year's 1 percent.

While salary buget adjustments will vary by an employers' industry and region, "one thing is clear: On average, employees are not seeing the same real pay growth they did even one year ago," said Bob Wesselkamper, Korn Ferry's global head of rewards and benefits solutions.

'On average, employees are not seeing the same real pay growth they did even one year ago.'

Cash or Kudos

There's some good news for employers who don't anticipate offering big pay increases this year. When considering what rewards matter most in the workplace, white-collar workers are divided on whether they prefer recognition or extra compensation.

In a December 2018 Korn Ferry survey, which garnered 1,327 responses from professional-level employees, 45 percent of respondents said they would prefer a promotion with no raise, while 55 percent said they would prefer a raise with no promotion, if those were the only options.

"Appropriate compensation is key to a professional's job satisfaction, but at least as important is recognition for a job well done. This is critical for motivating and retaining your talent," said Dennis Baltzley, Korn Ferry global head of leadership development solutions.

Most employees would like to receive both a meaningful raise and recognition, which can be provided by differentiating rewards so that top performers receive larger pay increases.

"Companies looking to compensate employees in a tight labor market do not necessarily need to increase their overall budget and spending. Instead, they can support retention through great differentiation by setting aside a separate piece of the overall compensation budget for top-performing and high-potential employees," said Catherine Hartmann, North America rewards practice leader at HR consultancy Willis Towers Watson.

[SHRM members-only toolkit:Managing Employee Recognition Programs]

Perks or Pay

Cash may not be employees' top priority when it comes to work, particularly among Millennials. That's why employers should consider offering more time off or other benefits if they aren't giving larger pay raises.

"Some employees care an awful lot about work/life balance and working 45 hours a week instead of 70," said Cynthia Stuckey, a senior partner with Korn Ferry.

"Companies can use other levers within their total rewards program to motivate and retain employees," Hartmann said. "This means providing enhanced benefits, such as parental leave, elder care and tuition assistance, and career-oriented programs, such as formal mentorship and rotational assignments, that focus on where employees are in their life and career cycle."

When treating career advancement as part of a total rewards package, keep in mind that "the key to job progression is ongoing development and coaching to ensure professionals are receiving feedback in terms of how they are doing in their current role and what they need to do to be ready to take on added responsibility," Baltzley said.

Even if employees aren't ready for their next role, "knowing that there is potential for a promotion to a more challenging role is an excellent way to retain top talent," he noted.

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