The economy is influencing wage trends, and HR practitioners should take note.
On Wednesday, September 17th Jerome Powell announced a quarter-point rate cut.
Fed watchers anticipated this move. Rate cut expectations reached a new height following the latest report from the U.S. Bureau of Labor Statistics.
Sluggish job growth in August was the headline. Buried beneath was a more alarming stat: the labor market added 911,000 fewer jobs in the 12-month period from March 2024 to March 2025.
The labor market has seemingly been softening for some time.
What does this mean for HR practitioners? How will a softer labor market influence wage increases?
We saw a tiny canary in the coal mine in our recent Salary Budget Survey. Organizations are pulling back slightly on planned pay increases in 2026.
From 3.6 percent wage increases in 2025, employers anticipate a more modest 3.5 percent increase in 2026.
The difference isn’t huge, but it reflects the reality of the labor market. Job growth has ground to a halt, and wages are responding in an unusual way.
Typically, job switchers receive higher pay than job stayers. Makes sense: employees often leave when they find a better offer.
However, since February 2025, stayers have enjoyed 4.1 percent wage growth, while their job-hopping counterparts have seen salary increases of 4.0, according to the Federal Reserve of Atlanta.
With a cooling labor market, it’s tempting to cut back on wage increases. But remember, we’ve been here before.
Economists began predicting a labor market recession in 2022 when the Fed started raising rates.
Now, with two more rate cuts penciled in this year, the Fed’s dual mandate may be titling in favor of employment — tariff pressures notwithstanding.
Talent could once again become scarce, especially in industries still facing labor shortages. Without a comp strategy that accounts for budgetary realities while still making meaningful wage increases, organizations may find themselves in a bind.
Economic reality is reshaping compensation priorities
The era of cheap money and easy hiring is over.
HR practitioners face a new challenge: how to make the most out of every dollar. Budgets must work harder to deliver meaningful results.
But even with business confidence waning and some orgs looking to cut costs, HR must still focus on retaining high performers.
Whether the labor market keeps softening or tightens with rate cuts, it’s imperative to keep top performers. They’re your talent insurance, preserving the skills and institutional knowledge you need to thrive in up or down markets.
Let’s look at compensation strategies for a softening labor market.
Thoughtfully reward top talent: Regardless of the market, holding onto top talent is always a priority. High performers are usually the first to exit. After all, they have options, even in an employer’s market.
If your organization is pay-for-performance, make sure you’re differentiating pay enough with meaningful salary increases.
You might also offer more frequent bonus payouts or run a secondary cycle to reward deserving talent.
Control comp-related voluntary turnover: It’s cheaper to retain your current employees than backfill roles. Even with job stayers enjoying slightly higher wage growth than hoppers, voluntary turnover is still costly.
SHRM estimates the real costs of recruitment at 3x to 4x an employee’s salary.
Direct recruitment and onboarding costs are minimal compared to productivity losses and other soft costs of new hires.
Ramp times vary by position, but the minimum time to full productivity for new employees is at least two months.
And that’s for entry-level and low-skilled positions. Executive and director-level hires may not reach full productivity for a year.
How much of your voluntary turnover is comp-related? It’s hard to know for sure. Exit data might offer a clue, but departing employees may be reluctant to admit they’re leaving for more money.
National surveys indicate that 30 precent of workers could be retained with better salaries and benefits. Your top talent may be one meaningful merit increase away from staying.
HR practitioners must also fully understand the market rate for their internal jobs, acknowledging the tradeoffs of their competitive positioning. If you’re setting salary ranges below the market midpoint, you should expect higher turnover.
This doesn’t necessarily indicate an inefficient strategy.
Maybe you have a quicker time-to-hire and better onboarding than others. Higher turnover may be an acceptable tradeoff for keeping wages constrained.
By analyzing the costs of comp-related turnover against the costs of wage increases, you can better assess if your talent strategy aligns with business goals.
Evaluate your org chart: The best organizations strike the right workforce balance between managers and individual contributors.
Let’s be clear: the argument that middle managers are a waste of resources is short-sighted. Skilled middle managers transform corporate strategy into operational reality.
But how many layers of management do you need? A flatter hierarchy may reduce bureaucratic bottlenecks, allowing companies to achieve greater efficiency while also controlling costs.
Flatter org charts might also boost retention.
Eliminating the distance between junior employees and leadership creates more advancement opportunities, appealing to professionals seeking career growth. This scrutiny of job levels reflects broader trends happening across HR.
With current economic headwinds, compensation professionals must become champions of efficiency.
Adopting a cost-conscious mindset transforms HR practitioners from stewards of internal culture into powerful voices of business performance.
It isn’t just about cutting costs. Instead, it’s about thinking hard about your comp structures and making wage increases that withstand labor market fluctuations.
Plan for a labor market rebound
Variability is the enemy of forecasting.
While some signals point to a softening labor market with organizations sweeping in and gobbling up talent at a discounted rate, don’t make this your baseline assumption.
The labor market has defied expectations so far, and it may surprise everyone once again — especially now that the Fed seems committed to rate cuts.
If you’re not focused on protecting your talent franchise, you’ll end up unprepared if the job market lurches back to favor employees.
Beyond your pay practices, the labor market shifts over the past five years illuminate a broader truth about the compensation function itself.
Comp pros underestimate their influence in shaping the market.
The lessons of 2021 remain instructive. Post-pandemic hiring with unsustainable salary inflation contributed directly to our current macroeconomic challenges.
Today’s environment differs. Job growth has slowed while unemployment inches upward.
But compensation is the stabilizing force, keeping your talent franchise intact amid market turbulence.
At Payscale, we recognize your role in nurturing sustainable growth. Our solutions are your anchor amid uncertainty, providing the data and insights to set salary budgets and fine-tune comp structures.
While the labor market remains unpredictable, our partnership ensures you’ll maintain wage and workforce stability under any conditions.
Ready for a compensation strategy that works in any market? Payscale’s comp intelligence equips you to make the right pay decisions whatever way the wind blows.
Want a peek at planned wage increases by industry?
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