In the current climate of economic uncertainty, many are wondering about the effects of tariffs on compensation. Expectations vary considerably, with some optimistic that tariffs will positively impact compensation and others anticipating negative impacts on pay. The effects on compensation may differ significantly based on geography, industry sector, and more, so there is no simple answer to this question. That said, there are some interesting trends worth highlighting in this complex discussion so that HR and compensation professionals can make informed, data-driven decisions.

What Are Tariffs?

Tariffs are taxes imposed by a government on goods and services imported from other countries, typically charged as a percentage of the price a buyer pays a foreign seller. Tariffs may be used for a variety of reasons: to raise income for a government, to protect domestic industries and discourage consumption of imported products (i.e., attempting to rectify trade imbalances), or as a tool for trade or political negotiation.1 In general, the importers (i.e., American companies in the case of U.S. tariffs) pay the tariffs, and these funds become revenue for the U.S. Treasury. Businesses often pass their increased costs on to firms within the U.S., such as retailers, and the end consumer, leading to higher prices for their goods or services.2

How Could Tariffs Positively Impact Compensation?

In an effort to avoid the additional cost of tariffs on imports, some businesses are increasing domestic production. This strategy, known as reshoring, is most common in manufacturing industries, particularly machinery, automotive, electronics, and consumer packaged goods (CPG) manufacturing. This can markedly increase the demand for local labor and drive up compensation rates, particularly in markets with high demand but low availability of skilled labor. If new hires are needed urgently to reshore production quickly, speeding up the hiring process, this can contribute additional upward pressure on compensation.

It is important to note that there is significant regional variation in the scenario of reshoring driving up wages. In the U.S., some regions in the Southeast and Midwest currently have a density of manufacturing but a shortage of workers due to low unemployment. With an urgent need to increase labor in these regions due to rapid reshoring initiatives, the cost of labor is expected to rise, particularly in the short term. Employees in manufacturing and logistics in these regions may see sign-on bonuses, incentives for retention, and use of shift differentials, along with increases to base pay.3

The impact of tariffs on compensation will also be felt quite differently depending on an organization’s industry sector. By the end of 2024, employment in the manufacturing industry was 8% of total employment in the U.S.3 While manufacturing may see significant upward pressure on compensation, this may not be the case in other industries, particularly those that cannot shift to domestic production or relocate operations to other countries or regions with favorable trade agreements or those that increase the use of automation to offset the increased costs of imported goods, for example, lowering the demand for labor.4

How Could Tariffs Negatively Impact Compensation?

There are a number of ways in which tariffs could have negative effects on compensation:

Increased Costs. For companies relying on the purchase of imported goods and raw materials, such as steel and aluminum, tariffs will raise production expenses unless they can find domestic suppliers. Supply chain disruptions could cause businesses to face reduced profits unless they can lower their production and operating costs or increase the price of their products. In addition to the rising costs of imports, producers of exported goods, such as U.S. agricultural products, may see some of their customers, such as China and Mexico, turning to other suppliers with favorable trade relationships, such as Brazil.6 To control costs, adjust to tighter profit margins, and continue operating with smaller budgets, businesses may respond by making adjustments to employee compensation in the form of decreased pay raises and/or deferred bonuses, reduced benefits, hiring freezes, and even layoffs.5

Inflation and Economic Slowdown. As tariffs increase production costs for companies reliant on imported goods and materials and drive up consumer prices, the economy may face rising inflation alongside stagnant economic growth, a combination referred to as stagflation. In this scenario, HR and compensation professionals would face the challenge of paying competitive salaries while budgets tighten, with fewer opportunities for pay increases alongside potential hiring freezes, reduced hours, furloughs, and layoffs. If employees struggle with the rising cost of living alongside diminished compensation, they may become dissatisfied, leading to reduced motivation and increased turnover.7

Uncertainty and Market Volatility. As trade policies shift, businesses may find it difficult to operate in an unstable economy and develop long-term strategies for success. Market volatility is expected to impact multiple industry sectors, disrupting supply chains and production. Those focused on salary planning may need to rethink staffing and be conservative with pay raises and bonuses in order to stay viable in an unpredictable economic landscape, as seen in the COVID-19 pandemic. For example, stock market volatility could limit a company’s resources or at least encourage careful management of cash flow, perhaps impacting incentive equity awards and other forms of executive compensation.8

How Can ERI Help?

To effectively meet these challenges, HR and compensation professionals will need current market data to accurately determine the cost of labor in their geographic region and industry.  National pay scales may prove inadequate, so specific geographic differentials, as reported in ERI’s Geographic Assessor, will be essential to align pay strategies with local market trends. With geographic pay data for over 9,000 locations across the globe, including cost-of-living data, ERI’s Geographic Assessor is a trusted resource to set pay rates locally, whether you are reshoring, relocating, or reevaluating pay in your current location.

Reliable and up-to-date salary survey data, customized to the needs of the individual organization, will be essential to accurately benchmark pay rates for jobs at all levels. ERI’s Salary Assessor, with current market data for 19,000 job titles in 1,100 industries, is a vital resource for organizations of all shapes and sizes. Whether you need to create unique hybrid jobs or tailor pay adjustments for shift work or upskilling, ERI has the data and tools needed to set pay confidently as jobs adapt to the evolving economy. With HR and compensation professionals increasingly reliant on an array of salary surveys for comprehensive local labor market analysis, the Survey Management solution is another valuable resource to easily import, store, and compare your salary survey library with ERI’s robust compensation database.

Those focused on the impacts of tariffs on executive compensation specifically can turn to ERI’s Executive Compensation Assessor for current market data on executive salaries, bonuses, long-term incentives, non-equity incentives, stock awards, option awards, pension, and other compensation. Analysts can drill down on the data they need, creating peer groups based on industry, company size, and other user-defined criteria, and get access to relevant source documents, such as proxies, 10-Ks, annual reports, and information circulars from comparable companies.

In the scenario of reshoring, as new hires in competitive labor markets are brought on with attractive pay rates, HR and compensation professionals will need to be mindful of pay compression, in which tenured employees may find themselves with pay rates below that of recent hires, and other internal pay inequities, making pay adjustments as needed to motivate and retain existing employees.9  ERI’s Compensation Management solution includes tools specifically designed to address internal pay equity, including pay compression, helping subscribers continually monitor and adjust compensation in a fluctuating market.

Finally, transparent communication will be key to hiring, retaining, and motivating employees as companies make changes to staffing and compensation. With ERI’s Compensation Management solution, subscribers can effortlessly import employee data via upload or HRIS integration, manage compensation and benefits plans from design to implementation, and effectively communicate overall pay to employees using Total Rewards Statements.

With solutions for all organizations, ERI’s Assessor Platform provides the resources that HR and compensation professionals need to make data-driven decisions with confidence. Try a free demo today!

Sources

  1. Hahn, Clarissa. “Tariffs 101: What are they and how do they work?” Oxford Economics, 19 Mar. 2025, oxfordeconomics.com/resource/tariffs-101-what-are-they-and-how-do-they-work.
  2. Lee, Tori. “How do tariffs work, and who will they impact? UChicago experts explain.” UChicago News, The University of Chicago, 2 Apr. 2025, uchicago.edu/story/how-do-tariffs-work-and-who-will-they-impact-uchicago-experts-explain.
  3. Bahr, Kevin. “U.S. Manufacturing Employment: A Long-Term Perspective.” College of Professional Studies Blog, University of Wisconsin Stevens Point, 29 Jan. 2025, uwsp.edu/cps/2025/01/29/u-s-manufacturing-employment-a-long-term-perspective.
  4. Mohan, Pavithra. “Trump’s tariffs will have near-immediate effects on hiring and jobs.” Work Life, Fast Company, 4 Apr. 2025, fastcompany.com/91311660/trumps-tariffs-will-have-near-immediate-effects-on-hiring-and-jobs.
  5. “Understanding Tariffs and Employee Pay Concerns.” Pulivarthi Group, 13 May 2025, com/blogs/understanding-tariffs-and-employee-pay-concerns.
  6. Antle, Olya, et al. “Mitigating Adverse Impacts of Tariff Hikes: Effective Strategies for Businesses.” Cooley LLP, 12 Mar. 2025, cooley.com/news/insight/2025/2025-03-12-mitigating-adverse-impacts-of-tariff-hikes-effective-strategies-for-businesses.
  7. Stanchak, Jesse. “Navigating Stagflation Risk: Impact of Tariffs for HR Leaders.” SHRM Business, Society for Human Resource Management, 7 Apr. 2025, shrm.org/enterprise-solutions/insights/navigating-stagflation-risk-impact-of-tariffs-hr-leaders.
  8. Bergmann, Michael, and Alessandra Murata. “Compensation Arrangement Considerations in Light of 2025 Tariffs.” Cooley LLP, 30 Apr. 2025, cooley.com/news/insight/2025/2025-04-30-compensation-arrangement-considerations–in-light-of-2025-tariffs.
  9. Hampton “The Role of Tariffs on Compensation Strategies.” Comp Tool, 7 Apr. 2025, comptool.com/tariffs-and-compensation-strategies.