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US employers are providing their employees with larger pay increases in 2023 than they have in years. According to new data from Mercer, annual merit increases have averaged 3.8%, while total compensation, which includes merit awards, as well as other types of compensation such as promotional, cost-of-living, and minimum wage increases impacting base pay, have increased by 4.1%. These figures are just below the estimates from last fall, but still remain above the increases provided in 2022, making them the largest since the 2008 financial crisis. This is great news for employees who have faced tough times due to the pandemic-induced economic downturn, but it begs the question: is this a sign of economic recovery, or is it a cause for concern? On the one hand, the increase in compensation can be seen as a sign of a recovering economy. As the job market continues to improve, employers are offering higher wages to attract and retain employees. Moreover, the life sciences, energy, and services industries, which are among the fastest-growing sectors, are leading the way with the largest compensation increases. This suggests that these industries are doing well and are optimistic about their future growth prospects. On the other hand, there are signs that things may be starting to slow down. While the increase in compensation is a positive development, it is important to note that the actual increases are slightly below the initial projections from last fall. Moreover, the average base pay increase has dropped from 4.7% to 3.4% from January 1, 2022, to March 2023, indicating that pay is being driven up by more than just annual increases. Additionally, fewer organizations plan to give base pay raises this year, with only 80% of organizations saying they plan to do so in 2023, down from the 92% that gave raises in 2022. This may suggest that companies are becoming more cautious about the economic outlook and are holding off on offering large compensation increases. Furthermore, while pay transparency legislation has given employees more data than ever to assess their compensation in the external market, it is also putting pressure on employers. With more and more employees demanding pay transparency, organizations are feeling the pressure to offer competitive and equitable compensation packages. Despite these signs of potential slowdowns, there are still several reasons to be optimistic about the economy. For one, the labor market is still strong, despite signs of a slowdown in some industries. This suggests that there is still demand for workers, which is driving the increase in compensation. Additionally, many organizations are looking at compensation more strategically and are focused on addressing critical gaps in pay equity. The increase in compensation in 2023 is a positive development and suggests that the economy is recovering. However, signs of potential slowdowns indicate that companies may be becoming more cautious about the economic outlook. Nevertheless, with the labor market remaining strong and organizations focused on addressing pay equity, there are still several reasons to be optimistic about the future. Compensation studies are one of our specialties. We have deep experience with base compensation benchmarking, incentive program development, and total rewards. Check out our updates on workforce strategy and compensation or contact us for other helpful resources.