Compensation planning is no longer a routine HR task, it’s a strategic tool for staying competitive. Since 2020, shifting employee expectations and economic changes have made wage growth unpredictable. For employers, understanding where pay is headed is essential for attracting and retaining talent while managing long-term labor costs. Discover the forces that have driven wage increases in recent years, emerging trends, and how you can build a more resilient compensation strategy.
Key Factors Behind Post-COVID-19 Wage Increases
After the initial disruption of COVID-19, wage growth surged between 2021 and 2022 and remained elevated through early 2025. Several factors contributed to this trend, including:
- Labor shortages. The U.S. workforce declined due to early retirements, caregiving demands, and lower immigration, leaving many employers struggling to fill roles.
- High job turnover. Workers had more bargaining power and often switched jobs for higher pay, especially in industries like retail, healthcare, logistics, and technology.
- Inflation pressures. As inflation spiked in 2022, employers raised wages to help workers maintain purchasing power.
- Pay transparency laws. New salary legislation increased pressure on employers to raise or justify pay levels.
According to the Atlanta Federal Reserve, these factors contributed to a wage growth peak of 6.7% in 2022, well above the pre-COVID-19 average of 3%.
Signs the Labor Market is Stabilizing
Looking ahead, most indicators suggest that wage growth will settle, though not necessarily collapse. Several trends are contributing to this shift:
- Steady job market. The quits rate (voluntary exits) has dropped from 3.0% to 2.0%, and job openings have declined by over 4 million since their peak. As a result, employers are regaining some leverage in salary negotiations.
- Less payoff for switching jobs. Early 2025 data shows that workers staying in their roles are seeing slightly higher wage growth than those who change jobs, a reversal from recent trends.
- Economic caution. Business leaders are monitoring global risks (e.g., tariffs, interest rate changes, geopolitical tensions) that could slow long-term pay commitments.
- Productivity and automation. In certain professional roles, generative AI is reducing labor needs, at least on the margins, moderating wage growth expectations in some fields.
How Demographics are Reshaping the Workforce
Beyond economic trends, demographic shifts are also reshaping the labor market:
- Baby Boomers are leaving the workforce at an accelerated pace, with fewer reentering than expected. This represents the largest sustained U.S. workforce exit in history.
- The U.S. has experienced more than a decade of below-replacement-level birth rates, shrinking the pipeline for new workers.
- Historically, a buffer for workforce shortages, immigration remains politically sensitive and inconsistent.
Together, these demographic shifts point to a future where talent scarcity becomes the norm, not the exception.
Planning for Long-term Pay Trends
Taking all these dynamics into account, organizations should plan for average wage growth of approximately 4.0% annually through 2032. That’s higher than the pre-COVID-19 norm but still well below the 2022 spike, reflecting a labor market that’s tight but no longer overheated.”
Results will vary by role, industry, and region. Some sectors (e.g., health services, skilled trades) may continue to face 5% to 6% wage growth pressures, while others (e.g., administrative support, commoditized roles) could see increases closer to 2% to 3%.
How to Prepare Your Compensation Strategy
Instead of reacting to market shifts, you can take control with a proactive compensation strategy. A data-driven approach helps you manage labor costs, strengthens retention, improves workforce planning, and positions your organization for long-term success. Connect with a member of our compensation consulting team to learn how we can help you design competitive, data-driven compensation strategies.
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