Companies are expected to dole out smaller raises this year, at least according to a leading research firm. And that could be good news.
Normally, robust wage growth is a good thing for workers’ wallets and the economy.
But Federal Reserve officials are hoping hefty average pay increases moderate to cool inflation. That, in turn, could convince them to pause their aggressive interest rate increases. which has led most economists to forecast a recession this year.
The prospect of further rate hikes helped send the Dow Jones industrial average tumbling nearly 700 points Tuesday.
For experts worried about a recession, at least some solace can be found in fresh survey data from Payscale, a compensation research and software firm. Eighty percent of employers plan to provide base pay increases in 2023, down from 92% last year, the Payscale poll shows.
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What is the pay raise in 2023?
Organizations are still handing out sturdy raises, with 56% of those surveyed planning to give bumps of more than 3%, up from 53% last year. But fewer firms say they’ll allot large pay increases of more than 5%. That means the average raise is likely to shrink a bit from upwards of 5% to 4% to 5%, Payscale says.
“Some employees may not see their pay increase as high as last year because of economic concerns or because their organization gave higher pay increases last year,” says Amy Stewart, an associate director of content for Payscale.
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Is the job market still hot?
Make no mistake: The labor market is still hot and many companies are still struggling to find workers after many older Americans retired early during the pandemic.
In December, there were 11 million job openings and 4.1 million people quit jobs. Those are remarkably strong numbers but they were down from 11.9 million openings and 4.5 million quits, both record levels reached since late 2021.
Job growth slowed to an average monthly pace of about 300,000 in the last three months of 2022, down from more than 400,000 in the prior quarter. Employers added an eye-popping 517,000 jobs in January but some economists attribute the booming gain to quirky adjustments the Labor Department made to account for seasonal variations, especially during a health crisis.
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What is wage growth?
Wage growth also has been slowing somewhat. Annual wage growth in the private sector dipped to 5.1% in the fourth quarter from 5.2% in the previous three-month period, according to the Labor Department’s Employment Cost Index.
Some other surveys, however, show employer pay increases set to pick up this year. A fall survey by research firm WTW had average estimated salary increases rising to 4.6% in 2023 from actual pay rises of 4.2% last year.
A Conference Board poll highlighted a similar trend, with budgets for salary increases rising to 4.3% from 4.1% last year.
In 2019, just before the pandemic, pay increases averaged about 3%.
While strong wage growth is typically welcome, inflation has outpaced pay increases for many Americans.
What is the current inflation rate?
The Fed should be heartened by Payscale’s survey that points to a modest slowdown in raises. Noting that goods inflation is already pulling back and rent increases are expected to soften this year, Fed Chair Jerome Powell has said tempering wage growth in services industries is key to curbing inflation over the long term. Companies often pass along their higher labor costs to consumers through higher prices.
Overall inflation was a still-elevated 6.4% in January, down from a 40-year high of 9.1% in June.
