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5 reasons your small raise could get bigger

Demonstrators gather in front of a McDonald's restaurant to call for an increase in minimum wage on April 15, 2015 in Chicago, Illinois.
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Demonstrators gather in front of a McDonald's restaurant to call for an increase in minimum wage on April 15, 2015 in Chicago, Illinois.

Average U.S. wage gains have been frustratingly modest despite an under-5% unemployment rate since early 2016. Low unemployment generally makes it harder for employers to find qualified workers, forcing them to boost pay.

But the annual increase in average hourly earnings has hovered at about 2.5% since late 2015, Labor Department figures show. That's up from around 2% in prior years but below the 3%-plus economists have anticipated.

Don't despair. Here are some signs the small raises you've been getting could soon get bigger:

More job openings. Employers advertised a record 6.2 million job openings in July, and businesses are increasingly chasing a shrinking pool of uncommitted workers. There were 1.5 unemployed Americans for each job opening in July, down from 6.7 jobless people for each vacancy in 2009 and a healthy 2:1 ratio. Eventually, something's got to give, economists say, and that something will probably be your paycheck as firms work harder both to attract and retain workers.

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Employers can't find workers. Evidence for the tight labor market can be found not just in the number of job openings but in the testimony of employers. The share of small businesses who say they have positions they can't fill right now was at 31% in August, close to a 16-year high, according to a National Federation of Independent Business survey and Capital Economics.

Job switchers getting bigger raises. Full-time workers who switch jobs are getting yearly raises that are a half a percentage point larger than their counterparts who stay in the same position, according to the latest ADP Workforce Vitality Report. But similarly big pay increases for job holders typically follow gains by job switchers within months, says Tom Porcelli, chief U.S. economist of RBC Capital Markets.

Minimum wages are rising. More jurisdictions are lifting their minimum wages, with states such as California and New York and cities including Seattle and San Francisco gradually moving toward $15 an hour over the next few years. That also could push up pay for higher-level employees.

Slack in the labor market is diminishing. Some economists have argued that wage growth has been tempered by a surplus supply of workers who aren't counted in the official unemployment rate. Yet that shadow labor force is shrinking, too. In August, there were 5.3 million part-time workers who prefer full-time jobs. That's still above the prerecession level of 4.6 million but below 6 million a year ago and a peak of 9.2 million in 2010. Similarly, the number of discouraged workers on the sidelines who want a job totaled 448,000 in August, above the prerecession mark of about 300,000 but below the year-ago figure of 576,000 and the 1.3 million peak in 2010.

"More firms chasing fewer workers will put wage growth on an upward trend again before long," says economist Andrew Hunter of Capital Economics.