Inflation worries means raises will continue, report finds

The high demand for workers and ongoing worries about inflation means that a strong majority of employers will keep next year’s salary increases similar to this year, with data showing pay increases at 4% on average for 2023, according to a new report from Payscale.

Payscale found that 78% of organizations in the U.S. and 81% in Canada say they’ve set their salary increase budget the same or higher for 2024. Payscale’s prediction for 2023 was originally a 3.8% increase in average wages in the U.S. for this year, but a resilient economy may have resulted in more competition for wages.

The compensation data company said that the market is beginning to cool a bit, noting that unemployment increased, and inflation dropped in the first half of this year. In addition, its survey of more than 1,700 employers found that the percentage of organizations expecting to lower their salary increase budget went from 9% for 2023 to 22% for 2024.

“Although employers may want to bring salary budgets down after recent wage growth, it is still very much an employees’ labor market with skills shortages persisting in some sectors,” said Ruth Thomas, pay equity strategist at Payscale. “When it comes to pay increases, the last few years have indicated that the new normal may be in the 3.5%-4% range, but that could change if we go into a recession. In addition to salary budget reports, organizations will need to keep an eye on wage growth trends and continue to invest in up-to-date market data to remain competitive and ensure that pay is fair.”

Labor shortages still driving wages up

When U.S. companies were surveyed, 57% said they would keep their salary increase budget the same in 2024 as it was in 2023. Those who said the budget would go up made up 21% of companies, with 22% saying they expected the budget to be lower. The biggest driver for higher salary budgets was increased competition for labor or a shortage of labor supply (65%), while 34% said the increase was due to a change in compensation philosophy or for competitive positioning. Improved economic conditions and/or business performance was cited by 27% of companies who increased their salary budget.

Of the companies that expect to reduce their salary increase budget, 77% said they did so because increases last year were higher than usual; 44% said they were concerned about future economic or business conditions; and 8% said it was because of reduced competition for labor or a labor supply surplus.

The survey found that 64% of companies adjust their salary structure and/or salary ranges every year, with 14% saying they do so every two years, and 5% saying they adjust salaries every three years.

Higher pay raises found in science, government, and… the arts?

There were some surprising numbers among the average salary increase numbers for different industries in the U.S., but the data included a good deal of variation among employees, management, and executive categories.

The top industry for raises was engineering and science, averaging raises of 4.4% to 4.7% for 2023. Government workers in all categories averaged raises of 4.5%. The energy and utilities sector averaged raises of 4.0% to 4.3%; and in a bit of a surprise, arts, entertainment, and recreation was an industry with above-average rates of pay raises. Although officers and executives in this category only saw rates of 3.3% for increases in pay, other employees and managers ranged from 4.2% to 5.0% in pay increases.

Related: Inflation, shifts in coverage options could impact 2024 health premium rates

Industries where pay raises were more moderate in 2023 included retail and customer service at 3.5% to 3.9%; health care and social assistance at 3.4% to 3.8%; and education at 3.4% to 3.7% on average for pay raises, the report’s data showed.