Compensation Planning: Adapting to the Evolving Labor Landscape 

The following article was first posted in the Insights section of Mercer’s website. It is reposted here with permission.

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After years of disruption from the COVID-19 pandemic, the U.S. labor market returned to normalcy in 2024, but signs of decline are emerging in 2025.

Quit rates align with pre-pandemic norms, layoffs remain low, and unemployment is still low.

The labor market’s unprecedented conditions in 2022 and 2023 led to rapid compensation growth due to high demand for talent.

However, in 2024, the narrowing supply-demand gap has reduced pressure on employers to offer compensation premiums, resulting in fewer reactive pay changes.

Economic policy uncertainty is causing companies to slow spending and adapt cautiously.

While unemployment is currently low at 4.2%, it is rising, and job openings are declining, leading to more unemployed individuals than available positions.

Despite recent job reports showing hiring exceeding expectations, this trend may not be sustainable due to anticipated cost increases from policy changes, particularly in goods-producing industries.

Year-over-year changes are crucial for annual planning.

Leaders can leverage data from U.S. Mercer Surveys, including QuickPulse: Job Architecture Edition, November 2024 Compensation Planning, and Benchmark Database insights to guide pay decisions.

This article highlights four key trends: workforce supply and demand, merit process modernization, frontline workers, and pay transparency.

Supply and Demand Drives Compensation

This year, the talent supply and demand gap has narrowed to levels similar to the 2019 job market, which is expected to impact salary increase budgets for next year.

After salary budgets rose from 2021 to 2023 due to high talent demand, organizations reduced increases in 2024.

Although employers initially projected steady increases for 2025, actual increases fell slightly below 2024 levels, indicating a return to pre-pandemic trends as the labor market stabilizes.

Download the full article  to learn more about how Mercer’s comprehensive data, consulting services, and analytical tools can help organizations with their talent needs.  

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About the authors: Jack Jones is a principal consultant, compensation and total rewards, with Mercer. Lauren Mason is a partner and U.S. workforce solutions leader with Mercer.