Workers Have High Hopes for Pay Hikes Next Year. Perhaps Too High

The pay negotiation season is looking increasingly fraught this year as workers fret about 8% inflation — and their job security.

While the labor market remains tight, evidenced by last month’s better-than-expected increases in both jobs and wages, employers are gaining back some leverage just in time for the tough conversations between bosses and employees to begin. This week Goldman Sachs Inc. said smaller bonuses and job cuts are coming while the running tally of tech layoffs hit 52,771 in November, the highest monthly total for the sector since Challenger, Gray & Christmas began keeping detailed industry data in 2000.

“Over the last year employees knew they could get more money if they left and that remains true, but the ease with which they can get a new job has decreased,” said Tony Guadagni, a senior principal at consultant Gartner Inc. “It’s not the job market it was even three months ago. That shifts the balance of power back to organizations a bit. How they use that to their advantage is a bit unclear, and that’s the big thing to watch as we go into this cycle.”

One thing that’s clear is the gap between the raises that workers expect for next year — 5.5%, according to Gartner — and what companies have budgeted for, typically between 3.5% and 4.5%. One or two percentage points may not seem like much, but it can represent hundreds of millions of dollars.

Some of that disconnect stems from people mistakenly assuming that their employers would deliver raises in line with inflation, but in the current price environment a cost-of-living boost isn’t realistic in most cases. The fault also lies with employers for keeping their compensation practices deliberately opaque for years. While that’s starting to change, sparked by movements to improve transparency, this compensation cycle could be a particularly contentious one, as employees and bosses each have reason to dig in their heels.