Two-Thirds of U.S. Employers Cut Raise Budgets Amid Economic Uncertainty

Economic anxiety is prompting a widespread reassessment of compensation strategies among U.S. employers, with a majority scaling back or completely removing raise budgets. According to a Payscale report released in August 2025, nearly two-thirds (66%) of employers cited concerns about future economic conditions or business performance as the primary reason for reducing their 2026 compensation budgets, a 17 percentage-point increase from the previous year [1]. The survey, based on responses from over 1,500 Payscale clients, reveals that while average base pay is still expected to rise by 3.5% in 2026—slightly down from 3.6% in 2025—this growth reflects a tightening of spending rather than a decline in overall wage expectations [1].

The shift is part of a broader trend of cost management in response to lingering inflation and geopolitical uncertainty. In June 2025, inflation reached 2.7%, the highest level since February, and the Trump administration’s recent imposition of sweeping tariffs on key trade partners has added further uncertainty to the business environment [1]. These factors have contributed to a more cautious approach to compensation planning, with companies prioritizing fiscal restraint over discretionary spending on employee raises.

Ruth Thomas, chief compensation strategist at Payscale, highlighted that while wage growth currently outpaces inflation, employees are still feeling the effects of past high inflation. Tariffs, she noted, may also influence how much employees spend on goods, adding another layer of complexity to compensation planning [1]. Thomas advised employers to be transparent with employees about the economic context shaping pay decisions and to use limited raise budgets strategically, particularly by rewarding key talent in sectors with lower labor demand, such as technology [1]. She emphasized that identifying the talent crucial to business transformation should be a top priority for HR departments as they navigate the current financial climate.

Despite the current retrenchment in raise budgets, some analysts forecast that wage increases may return to levels seen in 2025 by 2026. However, the report suggests that the current environment is characterized by a long-term shift toward fiscal caution rather than a temporary market fluctuation [1]. As businesses continue to adjust to uncertain economic conditions, the pressure on employees to accept lower or delayed compensation increases is likely to persist, potentially affecting morale and retention in a labor market that once emphasized high demand and competitive pay.

Source:

[1] Fortune – Anxiety about the economy is forcing two-thirds of U.S. employers to yank budgets for raises

https://fortune.com/2025/08/12/economy-anxiety-compensation-budgets-inflation/