NEW YORK - Employers are dispensing notably smaller pay raises this year - well below the 4 percent-plus increases routine before the economy lost its footing - and workers should not expect much improvement in 2004.
Companies tapped in a pair of surveys have budgeted pay increases averaging 3.3 percent to 3.5 percent this year and plan about the same next year, the smallest raises for workers since at least the mid-1970s.
The belt-tightening reflects employer efforts to balance pay with rising worker health care bills and pension costs in a business climate that has made it difficult to raise prices for their own products, according to a survey to be released Wednesday by Mercer Human Resources Consulting.
Those pressures are layered on top of employers' continued caution about the lingering downturn and an anemic job market with an oversupply of workers, says the Mercer survey and another put out last month by the Conference Board, a private research group.
Employers "are saying I can't raise prices. Well, I've got to raise productivity," said Steven Gross, a compensation consultant for Mercer. "People are flogging their workers to get more out of them as a means to increase profits, coupled with the fact that there's more supply than demand for labor today."
That approach is also evident in companies' early planning for next year. Employers in both surveys said they expect to grant median increases of 3.5 percent in 2004. Even with inflation remaining low, the limited raises will cap real gains below 1 percent this year and next.
Over the past ten years, pay increases have topped the rate of inflation by between 1.1 percent and 2.6 percent, according to the Mercer survey.
"That's really the whole key ... It's not the percent size of the increase. It's the increase relative to inflation," said Charles Peck, compensation specialist with the Conference Board. "It's getting a little bit tight."
The findings in the surveys are supported by another recent report by business publisher BNA Inc.
The BNA index, which uses economic data to gauge wage trends, was flat in the second quarter of this year pointing to a labor market "stuck in neutral," the company said. Continued layoffs have created an even larger surplus of workers, which should limit pay raises for months to come, BNA said.
The findings in the two employer surveys mark a step back from last year, when companies looking ahead to 2003 said they planned 4 percent pay raises across all groups of workers.
The new Mercer study, based on an April survey of about 1,700 companies, found that employers are granting average increases of 3.3 percent this year, a figure that rises to 3.6 percent when companies with pay freezes are not counted.
About 12 percent of the companies surveyed have imposed a pay freeze for at least some of their workers this year, down from 16 percent in last year's survey.
Next year, the employers surveyed are planning average pay increases of 3.5 percent, or 3.6 percent not counting the companies anticipating freezes. The raises vary by job category, with raises for executives slightly higher than those for other workers.
The Conference Board survey, which tracks total pay budgets rather than individual increases, found companies increasing overall compensation by 3.5 percent this year, with plans for the same increases next year. This year is the first time the figure has fallen below 4 percent since the Conference Board began tracking salary increases in 1975. The previous low was a string of 4 percent readings in 1994 through 2002.
The Conference Board survey includes data from 531 companies out of about 2,700 that received the questionnaire in late April and early May.
Inflation is expected to hover around 2.6 percent this year and 2.7 percent next year, limiting how much more people will really be taking home.
Last year, when raises averaged 3.8 percent according to the Mercer survey and 4 percent according to the Conference Board - inflation was at an extremely low 1.6 percent, helping to make up for the limited pay increases.
Pay raises averaged about 5 percent in the early 1990s before slowing to nearer 4 percent in the latter half of the decade. Those increases coincided with low inflation. When inflation was much higher, particularly in the early 1980s, raises were much more robust.
In 1981, for example, pay jumped 10.6 percent after a year in which the government's Consumer Price Index rose 12.4 percent, according to the Conference Board.