Early Forecast: 2018 U.S. Salary Budget Increase Pegged at 3.2%

Economic growth is picking up, but will wages keep pace?

Stephen Miller, CEBS By Stephen Miller, CEBS May 31, 2017
Early Forecast: 2018 U.S. Salary Budget Increase Pegged at 3.2%

updated July 12, 2017

Among employers in the U.S., salary increase budgets are expected to grow by 3.2 percent in 2018, up from a 3.1 percent increase in 2017 and 3.0 percent in 2016, according to a May forecast.

Salary budgets represent funds that employers are planning to spend on employee compensation but do not necessarily represent the average salary or wage increase that workers will receive.

The 2018 pay projections were reported in Planning Global Compensation Budgets for 2018 by ERI Economic Research Institute, a compensation analytics firm in Irvine, Calif. The firm's projections are based on data from over 20,000 companies and analysis of government statistics, such as the following:

  • Gross domestic product in the U.S. is expected to increase by 2.5 percent next year, up from 2.3 percent in 2017 and 1.6 percent in 2016—an improvement but below the Trump administration's goal of 3 percent growth for the economy.

  • Inflation is forecast to slow to 2.4 percent, down from 2.7 percent this year but higher than the 1.3 percent reported for 2016.

  • The unemployment rate is predicted to fall slightly to 4.6 percent, down from 4.7 percent this year and 4.9 percent in 2016.
17-0704 economic forecast 2.jpg

(Click on charts to view in a separate window.)

A Subsequent Report

In July, WorldatWork, an association of total rewards professionals, released top-level results from its 2017-2018 Salary Budget Survey, with actual 2017 and projected 2018 salary budget increases that account for planned general increases/cost-of-living adjustments and merit increases. In the table below, the "mean" is the mathematical average while the "median" is the middle value after listing reported budget increases expectations in successive order. Outliers, or extreme values on either the high or low end, have the biggest effect on the mean and less effect on the median.

Total U.S. Salary Budget Increases by Employee Category

Employee Category
Actual 2017
Actual 2017 Median Projected 2018 Mean Projected 2018 Median
Nonexempt hourly nonunion
Nonexempt salaried3.0%
Exempt salaried3.0%3.0%3.2%3.0%
All 3.0% 3.0% 3.1% 3.0%

Source: WorldatWork 2017-2018 Salary Budget Survey, top-level results. Survey data collected through May 2017.

In Canada, the average 2017 salary budget increase (both mean and median) was 3.0 percent, WorldatWork reports. For 2018, Canadian employers project a salary budget increase of 3.1 percent (mean) and 3.0 percent (median).

WorldatWork this year received a total of 4,942 survey responses for 11 countries in addition to the U.S. and Canada.

"Companies are budgeting conservatively," said Kerry Chou, CCP, senior practice leader, WorldatWork. Nevertheless, "I wouldn't expect to see widespread adjustments to the 2018 budget."

Investing in Workers

"The 2018 projections indicate salary increase budgets throughout the majority of the world between 2 percent and 5 percent," said Linda Cox, CCP, global total rewards expert at ERI Economic Research Institute. "The global economy seems to be gaining momentum," she noted, and the U.S. economy is expected to expand due to the current administration's eased fiscal policy, among other factors.

However, wages haven't kept up with rising productivity in the U.S. and elsewhere, while technology has driven the decline in labor's share of national income, Cox pointed out. (For a different viewpoint, see the box below.)

For employers, the economic recovery provides "an opportunity to look at their total rewards strategies and practices" to ensure fair distribution of rewards based on performance for all employee groups, Cox said.

Employers should also ask whether they are preparing their workforce for technological advances, such as artificial intelligence, that will continue to displace jobs.

"A breakthrough in technology fundamentally changing the way people work also requires an investment in human capital to prepare employees for the future," Cox noted.

[SHRM members-only HR Q&A: How can I locate resources for salary survey data for all industries and occupations?]

Wage Growth Is Low but So Are Inflation and Productivity

Forecasts based on economic data are subject to interpretation, and different economists will judge differently whether the glass is half full or half empty.

Over the last 24 months through March, for instance, U.S. inflation has been pegged at 1.4 percent a year and productivity growth at 0.6 percent, Neil Irwin, senior economics correspondent for The New York Times, recently reported.

"Those are very low numbers," Irwin noted, and "you may expect average worker wages to have risen only 2 percent." However, "the average hourly earnings for nonmanagerial private-sector workers rose 2.4 percent a year in that period," which is "more than we might have expected, with inflation and productivity so weak."

"If anything," Irwin wrote, "the numbers show that workers are capturing more than their share of the spoils from a growing economy."

Wage-Constraining Pressures

"Some economists also point to rising costs of benefits such as health care as a brake on take-home pay," wrote MarketWatch's Jeffry Bartash. "If companies have to pay more to insure their employees, they’ll offset the cost by raising wages more slowly."

He also noted global competition, given that "companies may be too afraid to take on added labor costs for fear of losing out to domestic and foreign rivals who pay workers less," and the skills gap, since "many U.S. workers...lack the necessary skills to warrant higher pay" and "companies have to pay more to train new or future employees who won’t be as productive when the first start out."

Downward pressures on wage growth were also noted by Scott Kingdom, vice chairman of the Korn Ferry Institute, a research affiliate of pay consultancy Korn Ferry Hay Group.

"On the face of it, it doesn't make sense: strong demand for labor, yet stagnant wage growth," Kingdom observed. "The deeper reasons reveal a labor market that, in most sectors, is not as tight as unemployment numbers make it seem. Many employers can easily hire the talent they need without having to bid up on wages."

There are exceptions to the low-wage norm, Kingdom pointed out. "Top performers, especially those in high-growth niches such as in technology or alternative energy, always make more money. They may, in fact, see a bidding contest for their services."

But elsewhere, "in this era of ever-growing efficiencies and companies trying to boost profits by reducing expenses, wage growth is likely to be muted."

Different Strokes

While employees typically expect annual pay raises that outpace inflation, "that may not be a huge issue with all workers," Kingdom added. "Some baby boomers, for example, scarred by the 2008 recession and nearing retirement, may be just happy to have work regardless of pay." Moreover, "some people who aren't negotiating as hard for money are seeking instead different incentives such as flextime, telecommuting, and additional vacation and paid time off."

Related SHRM Articles:

Higher Wage Growth Expected for 2017, SHRM Online Compensation, January 2017

Wages Are Rising, Giving HR New Worries, SHRM Online Staffing Management, January 2017

Employers Budgeting for Retention in 2017, SHRM Online Compensation, November 2017


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