Employers Planning Pay Increases of 4.6% in 2023, Slightly Above this Year’s 4.2%, Study Finds

Even though companies are spending more on pay raises in a tight labor market, those increases aren’t yet keeping up with inflation.

According to a recent report from WTW, a business consulting company, overall salary boosts are forecast to be 4.6% in 2023. This is up from a mid-year estimate of 4.1% and higher than the 4.2% bump that workers got this year. The increase compares to 3.1% from 2018 through 2021.

Although it's difficult to predict the rate of inflation for next year, the current high rate of inflation has meant that even with higher-than-normal pay increases, households are still losing purchasing power.

The latest inflation reading, based on the consumer price index, showed an increase of 7.7% in October from a year earlier. This is the smallest 12-month increase since January.

Inflation is a normal part of an economy, but the current rate is far above the Federal Reserve’s target of 2%.

So far this year, the Fed’s rate-setting committee has boosted a key interest rate six times in an effort to bring down the rate of inflation. The idea is that by raising the cost of borrowing money, spending will decline and there will be less inflationary pressure due to lower consumer demand.

This can also lead to job losses. However, although there has been an increase in layoffs, the unemployment rate is still relatively low at 3.7%, according to the latest data.

Boston Federal Reserve President Susan Collins said Friday that she is confident inflation can be kept in check without a significant increase in unemployment.

"I remain optimistic that there is a way to re-establish labor market balance without a significant increase in the unemployment rate," Collins said in prepared remarks for a Boston Fed economic conference. "However, I am realistic about the risks of a larger downturn."

The current shortage of workers is a challenge for companies. Three-quarters of respondents to a recent survey said they struggle with attracting and retaining talent, leading to bigger salary budgets. Employers are also providing more workplace flexibility and placing a greater emphasis on diversity, equity and inclusion.

"Companies are taking a range of measures to support their employees as inflation rates continue to rise and the threat of an economic downturn looms," said Hatti Johansson, a research director at WTW.

The Workplace Trends Report is based on a survey conducted from October 3rd to November 4th with 1,550 responses from organizations in the United States.