Questions and answers about salary increase budgets in 2027 and beyond: Here’s your crystal ball

Most U.S. organizations begin planning for their salary-increase season every year around this time, and every year the same questions are asked: “What will the going-rate salary increase be for the coming year?” “Why aren’t salary increases budgets moving down (or up) given the state of the labor market?” and the classic, “With inflation on the rise, why aren’t salary increase also going up?” (Funny how that one is never asked in the reverse).  

This article answers not only these questions but also endeavors to be your “crystal ball” by predicting what salary budgets will be even beyond 2027. By understanding the economics behind these predictions, you can more effectively manage leader and employee expectations.  

Here we go again, but this time with a twist

If you’ve been a compensation or HR professional for a good number of years, the salary increase season often feels like déjà vu all over again. You’re asked the same questions from leaders and employees, with the primary one being “What is the going rate for salary increases this year?”  

Salary increase projections of 3.4% for 2027 appear to hold steady, showing just slightly below actual 2026 average increases of 3.5%, according to WTW’s 2026 Salary Increase Budget Survey Report — July edition. With that frame, leaders inevitably will also be knocking on your virtual door asking, “With the labor market showing slow hiring activity and people sticking with the jobs they have, why aren’t salary increases dropping more dramatically?”

That question, while a good one, requires a bit of education on labor market economics. As always, you may have to remind leaders that salary increases purely reflect the supply and demand of labor in a given market, such as the U.S.  

And while the demand for labor has slowed since the go-go days of 2021-2023 during the Great Resignation, the supply of labor has also remained historically low. You also may need to remind leaders that the U.S. worker shortage hasn’t changed since the days when that topic made headlines — and is likely worse given the rise in retirements and the slowdown in immigration.

The same answer you gave in the past about the supply and demand of labor driving salary budgets now has a bit of a twist because the labor market is balanced. You could say there is equilibrium in the supply and demand equation, which is why the unemployment rate stays stable, even as the number of job openings in the U.S. has shrunk quite a bit. It also is one of the reasons salary budgets have not moved very much from 2026 to 2027.

Make yourself comfortable in the land of 3%

On the opposite end of the spectrum, you are likely getting questions from employees about why salary increases always seem to be stuck in the “land of 3%,” where increases never seem to change much. Or you may be asked to forecast what salary increase budgets are likely to be in the future (typically from your CFO).

For the answers to these questions, we can look at the history of salary increases over time because digging into past salary budget data provides insight into how they will be set in the future. For historical perspective, Figure 1 shows salary budget data from WorldatWork’s Salary Budget Survey Reports dating back to 1974. 

What you see here are 52 years of salary budget data that tells a very distinct story. First, the most obvious pattern is the consistent stair-step down that salary increase budgets have taken over time.  While they were at an all-time high in the early 1980s (when variable pay was only for top executives), they decreased from there every few years. They also included some dramatic drops at certain points that reflected significant disruptions in the labor market that usually were accompanied by steep economic downturns (i.e., recessions).

The next obvious pattern is that once these drops occurred, salary increases never fully recovered to their prior higher level. They go up a bit over time, as they did in 2014 when the labor market finally stabilized after the Great Recession of 2009. But, just like past drops, they never went fully back to 2007 levels (until 2022 when we had a period of unprecedented hiring).

These historic patterns of salary increase budgets dropping and then sticking at a new low also can be seen in Figure 2, using the same data from Figure 1, with a description of the economic conditions that existed during those years.

The Great Recession that began in 2008 (but wasn’t fully reflected in salary increase budgets in 2009) caused the average increase in the U.S. to fall below 3% for the first time ever. That was primarily driven by the fact that nearly half of the companies that participated in the survey gave zero increase.  

While economic conditions meant they had no choice but to do that, a zero increase is not sustainable and salary budgets began to recover (i.e., restored to something above zero) by 2011. It took until about 2014 before they finally reached 3% again and they didn’t go back to their above-4% level until 2022, more than a decade after their historic low.

You’ll also notice that, in Figure 1, we had many years in the land of 3%. And we stayed there until the labor market went crazy in 2021 with a record number of Americans changing jobs. The subsequent years of the Great Resignation of 2022 and 2023 were when we finally made it back above 4%. Once the labor market stabilized starting in 2024, we are back in the land of 3%.

From this analysis, you can see a pattern emerging that allows us to forecast what salary increases are likely to be in 2027 and beyond. We know that salary increase budgets have gone below 3% only when the economy hit a deep recession and massive layoffs tipped the balance of the labor market in which supply significantly outpaced demand. We also know that salary increase budgets only rose beyond 4% in an unprecedented period of hiring in which the demand for labor severally outpaced supply.  

Therefore, we can confidently conclude that, unless one of these two typically unusual events happens again, the threshold of 3% to 4% is where salary increase budgets will be for some time to come. The 3.4% salary increase prediction for 2027 aligns with the fact that we remain in a relatively stable economic environment and labor market. Of course, the current state of global conflict, further tariff activity, unknown AI impacts, and political turmoil could drive a different outcome. But, for now, we can get comfortable in the land of 3% salary increase budgets.

What about inflation?

Since inflation hit the highest level in the U.S. in more than 40 years at 9.2% in June 2022, employees have asked why salary increases don’t match inflation. And compensation and HR professionals are probably still getting these questions even now as inflation has stabilized in the past couple of years.

Matching salary increases to inflation is actually bad for business for multiple reasons:

• Inflation goes up and down over time (in fact, before the pandemic in early 2020, inflation was 1.4%).  Salary increases are “sticky,” meaning they are given and then compound over time.  Employers don’t go back to employees and say, “I matched your salary increase to inflation but now that it’s gone down, you have to give some of the money back.”
• Inflation represents a market basket of goods, the largest of which are housing, food and energy. Employees get to choose what’s in that market basket and how they use their “buying power.”  Pay is driven purely by the supply and demand for labor. While pay also drives buying power, it is defined as the cost of labor. Inflation is defined by the choices we make as consumers as part of our cost of living. These are two different concepts that come together to represent true buying power. This is why it confuses people, but they need to understand the differences and what it means for pay increases.
• Matching salary increases to cost of living rather than cost of labor could have dire consequences on the cost structure of a business that can only be corrected through layoffs.

Knowing that salary increase budgets are likely to stay between 3% and 4% for the foreseeable future and inflation may also stay stable, but higher than desired, it’s worth educating on these points to ensure that you are making the best decisions for sustaining the business — and that’s advantageous for everyone.