Employers Budgeting for 3.5% Pay Raises Next Year

As employers begin to figure out their 2025 pay strategies, new data indicates that next year’s raises may be even lower than what other reports have estimated.

Payscale’s new Salary Budget Survey, which polled compensation professionals at 1,550 organizations between April and June, found that U.S. employers are planning for 3.5% pay raises on average next year—a dip from the past couple of years—due to a cooling labor market. Actual salary increase rates for U.S. employers were 4% in 2023 and 3.6% this year, according to Payscale, a U.S. compensation software and data company.

The majority of U.S. employers (66%) said 2025 salary increase budgets are expected to be the same as their 2024 salary budgets, 19% said 2025 salary budgets are expected to be higher, and 15% said they expect them to be lower.

Payscale’s data comes on the heels of two other reports projecting employer pay plans for 2025. Projections differ slightly between surveys based on what kinds of employers are surveyed—and how many—and when polls are conducted.

A July report from consulting firm WTW, which surveyed roughly 32,000 organizations between April and June, found that employers are predicting a 3.9% jump in salaries in 2025. And preliminary data from Empsight, a New York City-based human resource consulting firm specializing in compensation, found that total salary increase budgets will be 4% for 2025, while median merit budgets are projected to be 3.5% for 2025.

“Given the stabilization of inflation and the easing of labor market conditions, we’re seeing a slight reduction in planned salary increases for 2025, though figures are still above the 3% pre-pandemic baseline that employees have come to expect,” said Ruth Thomas, chief of research and insights at Payscale.

Overall, the economy is largely cooling after a period of significant job resignations and turnover during the past few years. The WTW report found that a stabilizing U.S. economy is a primary reason why many employers have begun to tighten their purse strings when it comes to pay raises: While around two-fifths of employers (38%) reported having trouble attracting and retaining talent in 2024, that figure has dropped almost 20 percentage points from two years ago (57%), WTW found.

Projected raises, however, differ by industries and sectors and vary by up to 1.4%, which Thomas said indicates that “labor is in higher demand for some organizations.”

Payscale found that government workers and workers in the engineering and science fields can expect to see higher-than-average salary increases, averaging 4.5% and 4.2%, respectively. On the flip side, retail and customer service employees and those who work in education, including teachers, will see raises of just 3.1%, falling below the standard for most industries.

For employers with higher salary budgets for 2025, increased competition for labor was the primary reason, followed by improved economic performance, according to Payscale. Those with reduced salary budgets cited outsized increases in years prior and concerns about the economy.

“Although perceptions of the current economy are mixed, organizations in a growth phase and those facing headwinds are competing for the same talent,” said Lexi Clarke, chief people officer at Payscale. “Employers must have a compensation strategy built on data to guide their salary increase budgets or they risk losing top talent this budgeting cycle.”

Employee Sentiment

Even though employers have been shelling out higher pay rates in recent years, employees aren’t feeling much relief as the high cost of living has taken its toll. An employee survey from the American Staffing Association and the Harris Poll earlier this year found that more than half of workers (53%) feel their paychecks are not keeping up with the pace of inflation.

In fact, Payscale’s Real Wage Index (which incorporates the Consumer Price Index) found that wages have risen 33.1% overall in the U.S. since 2006, but when factoring in inflation, “real wages” have actually fallen 12.6%.

“In other words, the income for a typical worker today buys them less than it did in 2006,” Payscale noted in its index.