Even as inflation slows at the end of 2023, planned salary increases for 2024 remain higher than average over the past 20 years. Employers continue to cite inflationary pressures and concerns over a tight labor market as the primary influencing factors behind salary increase budgets.
In April 2022, I covered why – despite severe talent shortages and the ongoing impact of the Great Resignation – corporate salary increase budgets trailed inflation and why salary increases move differently from inflation. A year later, in mid-2023, salary increases continued to move differently than inflation under changing economic conditions, with salary increases potentially again exceeding inflation for the first time since 2020 (and in a manner keeping with most years of the past two decades).
As it turns out, data from a new WTW survey and updates from the U.S. Bureau of Labor Statistics (BLS) report that salary increases did indeed exceed inflation in 2023 and likely will do so even more in 2024.
In the WTW survey, U.S. employers reported an actual average salary increase of 4.4% in 2023, during a year when BLS reported annual inflation of 3.1%. The survey also reports U.S. employers are planning an overall average salary increase of 4.0% for 2024, in contrast to many economists predicting lower U.S. inflation in 2024 (in many cases below 3%). Salary increases and inflation vary considerably by country, but this general trend is occurring in many (but not all) countries.
Why inflation and salary increases are not the same
With thanks to analysis by WTW’s Lori Wisper, several factors account for the difference between salary increases and inflation. While inflation and salary increases generally move in the same direction, influencing each other, they are driven by different inputs:
- Inflation is defined by changes in the cost of a market basket of goods (such as housing, groceries and fuel).
- Pay on the other hand, is driven by changes to supply/demand for labor, which can be caused by demographic trends, labor participation rates, unemployment levels, technological advances and growth in productivity.
For example, in 1979 – the year of the highest peacetime inflation on record – U.S. inflation was 13.3% but wage increases were a much lower 8.7%. Conversely, U.S. inflation was 1.9% in 2001, but salary increase budgets were much higher – near 4% – in 2001 and 2002. This difference tends to make employees feel advantaged in terms of real spending during low-inflation years and disadvantaged during high-inflation years.
Independent of inflation, pay increases generally are expected to remain high as long as unemployment remains low.
Actions of effective leaders
With thanks to WTW’s Hatti Johansson, effective leaders seek to strike a healthy balance through the following actions in 2024:
