Companies are setting aside 3.9% of their payroll budgets to raises in 2022, a record high not seen in a decade, according to a November survey of 240 U.S. businesses (half of which represent more than 10,000 workers) from the think tank the Conference Board.
That may seem like a small number, but it's important in a few ways, says Conference Board chief economist Gad Levanon.
First, while some of the biggest pay hikes have gone to people who changed jobs this year, the 3.9% salary increase budgets will go to existing employees in 2022. Almost half of companies from the survey said they're planning raises for current employees to keep pace with higher pay they've awarded new hires.
Second, these pay raises are expected to reach workers across company levels, from entry-level workers to executives, including hourly and salaried employees.
And finally, the 3.9% salary increase budgets mark the sharpest increase since 2008, even stronger than pre-pandemic levels when people at the time were quitting their jobs in order to secure higher pay and better work at the fastest pace on record — until now.
Wage growth has accelerated dramatically since the spring as the economy reopened and employers needed to staff up quickly. Meanwhile, workers primarily in lower-wage sectors suddenly had more opportunities to quit for a higher-paying job. People who changed jobs saw average wage growth of 6.6% in September, up from 5.1% in the first half of the year, according to the payroll company ADP.
As of October, there were 11 million open roles, 6.5 million workers were hired, and 4.2 million people quit their job. The "dramatic" gap between job openings and new hires, as well as sky-high turnover, shows that employers are having a hard time filling open roles quickly, Levanon says.
But when new hires see faster wage growth than current employees, it can lead to wage compression, or when people feel their experience is no longer valued, and they could seek their pay bump elsewhere.
As record turnover continues, especially across sectors that involve in-person and essential work, employers will have to raise wages for experienced employees to keep them from jumping ship.
Some 39% of businesses said they're raising pay to keep up with rising inflation.
Levanon says these cost-of-living adjustments are "making a comeback" due to inflation and will be "an important determinant of the average raises people are going to get."
But pay raises may not be enough to keep pace with rising prices. The Bureau of Labor Statistics estimates that between October 2020 and October 2021, the cost of goods and services that the average American buys (known as the consumer price index) increased by 6.2%.
This can result in a wage-price spiral, or when higher prices and rising pay feed into each other and accelerate even more. Businesses will have to decide how much to raise their salaries to keep their employees, Levanon says, while also deciding how much to pass on those costs to the consumer.
Levanon says the momentum for rising salary budgets will be strong in the coming months as the labor market continues to favor worker demands over employer hiring needs.
Some companies may have to revise their planned raises even higher. Levanon points out that lot of companies decided on their 2022 raises a few months ago before we had a clear picture of how much rising wages for new hires, as well as inflation, would impact the labor market.
"Now, they will see what other companies are doing, and that may incentivize raised salaries even more," Levanon says. "I expect if we do this survey again in three to four months, we'll get even higher numbers."
Union wages, meanwhile, are tied to long-term contracts and could adjust upward in the next year or two, he adds.