Workers grinding for their next pay increase could be left disappointed as companies allocate smaller budget increases for performance-based raises in 2024.

According to Mercer’s compensation planning survey, U.S. companies plan to increase their budgets for merit-based raises by 3.5% next year—down from 3.8% in 2023.

Budgets for all wage increases are expected to grow by 3.9% in 2024, down from 4.1% this year.

On an industry level, healthcare is projected to have one of the smallest compensation budget increases for merit-based pay at 3.1%. The technology sector’s budget for merit-based raises is forecast to be just 3.3%.

Merit-based compensation budgets at energy and consumer goods companies are projected to grow faster than the national average at 3.7%.

While most companies aren’t expected to finalize their budgets until later this month or even January, the data suggests American workers will get smaller pay hikes next year. Mercer said this could be partly due to a stabilizing labor market as hiring slows and quit rates decline.

"Overall, the use of pay increases to respond to labor market pressures has slowed down,” Mercer said. “Organizations are using off-cycle increases less frequently, though they do continue due to counteroffers.”

Workers losing their leverage

During the pandemic, Americans were offered sizable pay increases and greater flexibility as understaffed businesses competed for workers. But a cooling labor market has altered the power dynamic, with workers slowly losing their newfound negotiating power.

For starters, October job openings plunged by 617,000 to 8.7 million, the lowest in two-and-a-half years, according to the Labor Department. There were 1.34 vacancies for every employed person in October, down from 1.47 the previous month and the lowest since August 2021.

Employment growth is also slowing, with the private sector adding fewer than 300,000 workers in the last three months combined. That’s the weakest hiring pace since the pandemic.

In this environment, workers have less leverage to haggle over pay and bonuses, according to job site ZipRecruiter. The job site’s Q3 survey revealed that fewer new hires increased their pay or received a signing bonus when switching jobs.

“Some of the increased leverage that workers experienced during the pandemic [...] that control seems to be waning,” Julia Pollak, ZipRecruiter’s chief economist, told USA Today.

Will pay hikes outpace inflation?

When evaluating consumer spending power, pay increases are only one side of the equation. The other side is inflation.

As it turns out, Mercer’s projected pay hikes are well below Americans’ inflation expectations.

According to the University of Michigan’s consumer sentiment index, Americans think inflation will accelerate from October’s 3.2% annual rate, which was the slowest since March 2021. Households see inflation rising 4.5% over the next 12 months

Americans' consumer price expectations beat virtually every market inflation forecast.