Data from consulting firm Mercer projects steady increases to organizational salary budgets in 2025 after a dip in budget growth between 2023 and 2024, analysts said during a Sept. 18 webinar.
Actual budget growth for 2024 stood at 3.6% for total pay increases and 3.3% for merit increases, down from 4.1% and 3.8% in 2023, respectively. Mercer projected that 2025’s growth rates would equal those of 2024.
Analysts said that a tight labor market persists even as hiring demand has cooled over the past year, contributing to the projected steady budget growth. Mercer’s figures differ from those released earlier this month by The Conference Board, which predicted a 3.9% increase for salary budgets in 2025 thanks to a shrinking labor supply.
Labor demand was “well above” supply in 2022 and 2023, prompting firms to elevate their salary budgets and hand out pay increases, said Jack Jones, principal consultant at Mercer. While demand continues to outpace supply entering the final months of 2024, the share of job openings to unemployed workers has shifted closer to 2019 levels.
“The labor shortage is now actually slightly lower than what we were in 2019, but we do still see that gap of the talent available versus what is in demand,” Jones said.
Quit rates are in line with the historical norm in a nonrecessionary environment. But while several indicators reflect a healthy labor market, it’s still unknown whether the market is cooling down or trending toward a “collapse,” he added.
Overall, these trends indicate a potential return to a pre-pandemic labor market situation, something employers should take note of, said Lauren Mason, partner consultant at Mercer.
“We’re back to this return to normal, if you will, outside the frenzy of the labor market and the compensation race we’ve seen over the [last] few years,” Mason said. “It’s almost like if you could step back to where you were in 2019. From a supply and demand standpoint, that’s essentially where we are today.”
Whether the shortage of workers will improve appears to be up for debate, however. A report published last week by labor market data and analysis firm Lightcast found that U.S. employers could soon face the largest labor shortage in the country’s history thanks to the confluence of retirements, shrinking birth rates and a higher share of working age adults not participating in the labor force, among other factors.
From an industry standpoint, Mercer found that every segment it measured recorded a lower percentage change in average base salary in 2024 compared to 2023. This year, growth rates were highest for the mining and metals, insurance and reinsurance and nonfinancial services sectors. Logistics saw the largest drop in base salary growth, dropping from 7.6% in 2023 to 4% in 2024.
When examining base salary changes by career level, Mercer found lower growth across all levels, with para-professionals and managers experiencing the highest “cooling,” said Christian Montemayor, senior associate product manager at Mercer.
Among para-professional careers, manufacturing and production workers and contact center and customer service workers experienced the most cooling, he added. Manufacturing and production workers at the managerial level also saw the lowest growth rates among that segment alongside warehouse management workers.
“All of these roles are evolving along technological advances,” Montemayor said.
Employers may need to embrace pay transparency in the marketplace moving into next year, Jones said, given increased legislation on the subject and shifting worker expectations. That may include voluntary pay equity studies on a regular basis to determine potential pay outliers and fix them if necessary as well as developing or updating salary structures and pay ranges.
Merit increases are another important action item for Mercer in 2025, Jones said. Traditional merit pay processes may set a budget increase that is the same across all departments, but this approach can lead to pay stagnation in some business areas, perpetuating gaps and leading to unequal outcomes across departments. Specifically, Mercer recommended setting merit budgets based on business needs and strategic objectives and giving managers data-driven insights to help guide their decision-making.
“There’s a lot of different factors that should be playing into your merit allocation process,” Jones said. “You’ve got to set your budgets smartly and then allocate them wisely.”
