Employers in the U.S. are planning lower pay raises for 2025 due to cooling inflation and job markets, according to new reports. In 2024, roughly 47% of organizations reduced salary budgets compared to 2023, with the overall median pay raise dropping to 4.1%. For 2025, projections show a further dip to 3.9-4% in salary increase budgets. The stabilizing economy and reduced difficulty in attracting and retaining talent are influencing these tighter budgets.

Lower pay increases can slow consumer spending, as workers have less disposable income. This can, in turn, reduce demand for goods and services, potentially slowing economic growth. It might also lead to lower employee morale and productivity, impacting business efficiency. Over time, reduced spending and investment can affect overall economic stability and growth prospects.

Sydney Ross of SHRM noted that inflation has softened to 3% and the labor market is balancing out. Lower salary budgets are often driven by cost concerns. Despite declining, salary increases remain higher than pre-pandemic levels. Companies are also focusing on non-monetary rewards like flexible work policies and engagement programs to retain employees. Organizations aim to address market conditions with more holistic reward programs, including bonuses and health benefits. Prioritizing pay equity remains crucial.

Employers are adapting to the new economic reality by providing workplace flexibility and improving employee experience to manage costs effectively.

How about your company, are you planning for lower pay increases for your employees?