Employers see pay hikes staying high in 2024 as worker shortages persist

With shortages in the U.S. labor market persisting, companies are looking to implement high, albeit cooling, pay raises for next year in a bid to attract and retain employees.

For 2024, employee salary budgets on average are expected to increase 4.0%, according to a recent survey conducted by advisory, broking and solutions company Willis Towers Watson (WTW). While that forecast is smaller than the actual increase of 4.4% in 2023, it remains stronger than the 3.1% salary increase budgeted in 2021 and the decade before.

“This shows that companies are striving to stay competitive in an ever-changing work climate,” Hatti Johansson, research director, Reward Data Intelligence at WTW, said in a statement. “Those companies that have a clear compensation strategy as well as a pulse on the factors affecting it will be more successful attracting and retaining employees while keeping pace with an evolving environment in which yesterday’s certainties no longer apply.”

To shed more light on the state of the labor supply, May’s labor force participation rate – the percentage of the population that is either working or actively looking for work – of 62.6% is still trailing the pre-pandemic mark of 63.3% Still, the gauge has been steadily rising since plunge at the onset of Covid-19 to the lowest level in four decades, suggesting that plentiful jobs and higher wages are enticing people from the sidelines into the labor market.

More than two-thirds (70%) of employers budgeted for pay hikes to be either the same or higher in 2023 than the prior year, the survey found, while less than one-quarter (14%) of firms have budgeted for pay raises to be lower than last year.

This underscores how firms are vying to attract and keep talent, but “it takes more than compensation” to do so, said Lesli Jennings, North America leader, Work, Rewards & Careers, WTW. “As workforces become more diverse, demanding and dynamic, the key is understanding their specific needs and preferences while providing the desired employee experience and career opportunities within the company.”

WTW’s survey was conducted in April to June 2023 and received responses from 2,090 U.S. organizations. Some 33K sets of responses were received from companies across 150 countries.

In addition to concerns over a tight labor market impacted by worker shortages, respondents cited inflationary pressures, concerns regarding employee expectations, a looming recession and cost management as factors prompting changes to salary budgets.

The inflation spike stemming from the pandemic and subsequent fiscal stimulus has been easing since the June 2022 peak, but it’s still too high for the Federal Reserve’s liking. In the New York Fed’s May 2023 Survey of Consumer Expectations, consumers reduced their inflation expectations for the year ahead but nudged up their expectations for higher prices on longer-term horizons. Looking at another gauge of implied inflation, the University of Michigan Consumer Sentiment survey showed year-ahead inflation expectations fell from April to the lowest reading since March 2021, though inflation expectations for the next five years stayed at an elevated rate of 3.0%.

Both surveys reveal consumers reckon it will take a longer time for the central bank to achieve its 2% inflation goal as some inflationary forces, including a tight labor market, prove to be sticky. As such, workers may become more adamant about higher salaries to keep up with inflation, and consequently, higher borrowing costs. The latest nonfarm payrolls report, though, indicated that wage growth eased from a year ago, with headline average hourly earnings rising 4.3% vs. 4.4% Y/Y in April. That’s good news for the Fed and its inflation fight, as it calmed fears of a wage-price spiral, as well as consumers with wage growth surpassing that of inflation.

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