Companies across the U.S. economy are raising pay to recruit workers in a tight labor market, increases that are rippling through firms and prompting employers to rethink pay for existing staffers.

So-called wage compression—when pay for new hires or entry-level staff approaches what longtime staff or senior colleagues make—poses a financial and management challenge for employers, and has gained new urgency as companies fight to attract and retain employees amid record-high rates of job-quitting.

When companies announce pay increases for entry-level jobs, they also send signals to their internal workforces, said Diane Burton, academic director of the Institute for Compensation Studies at Cornell University’s ILR School and a professor of human resource studies. Those signals can prompt companies and individuals to reassess the value of skills, experience and seniority.

“The symbolic aspects of wages matter. People want to know how they stack up,” Dr. Burton said.

Chipotle Mexican Grill Inc. said in May that it was lifting its pay for hourly positions to an average of $15 an hour, amounting to an average raise of around $2 for front-line workers. Months before making the announcement, the company completed an analysis of how the change would affect pay for entry-level crew members along with other roles, from hourly kitchen and service managers to the salaried general managers who oversee a store’s operations, said Marissa Andrada, Chipotle’s chief diversity, inclusion and people officer.

“There’s a lot of analysis behind the scenes,” she said.

The chain, which owns and operates its nearly 2,900 locations, made sure the raises included a premium for experienced employees within each role, and gave raises that averaged around $2 an hour to hourly managers and commensurate raises to salaried managers. Ms. Andrada said Chipotle’s goal is to maintain appropriate wage differentials between crew members and more experienced or senior employees.

To pay for the extra labor expenses associated with the raises, Chipotle raised its menu prices by 3.5% to 4% this year, Chief Financial Officer John Hartung said in July. He also said Chipotle’s labor expenses would rise from 24.5% of total revenue in the second quarter to just over 26% in the third quarter.

Employers are also offering retention bonuses to match the hiring bonuses they are giving new recruits. In April, the Tennessee Department of Correction announced it is giving $5,000 signing bonuses, payable over 18 months of employment, to help fill the state’s 858 job openings. Current correctional officers will get a $4,000 bonus, the agency said.

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Low-wage work is in high demand, and employers are now competing for applicants, offering incentives ranging from sign-on bonuses to free food. But with many still unemployed, are these offers working? Photo: Bloomberg The Wall Street Journal Interactive Edition

A variety of factors are driving up wages, especially at the lower end of the pay scale. Employers such as restaurants and amusement parks are raising pay to lure laid-off workers back to jobs that boomed when pandemic restrictions were lifted. U.S. employers added 850,000 jobs in June—the biggest gain in 10 months; July figures will be released by the Labor Department on Friday.

Companies are bidding up salaries to poach from other firms, as quitting rates reach record highs. Wages for job-switchers rose 5.8% from June 2020 to June 2021, compared with a pay increase of 3.1% for people who had been in the same job for a year or more, according to payroll-data firm ADP Inc.

In some states and metro areas, minimum-wage laws are raising the pay floor and narrowing the gap between junior employees and those with more experience and responsibilities.

Before the pandemic, Karen Womack earned $16.70 an hour as a warehouse lead at Seattle’s T-Mobile Park, where she makes sure concession stands are stocked for Mariners baseball games. In January, the city’s mandated minimum-wage increase brought the pay floor for warehouse staff to $16.69 an hour. After the stadium reopened in May, the hourly differential between lead employees like Ms. Womack and the workers she trained and supervised shrank from around $1.50 to one penny.

“It didn’t feel fair at all,” said Ms. Womack, 50 years old. “I’ve been here 21 years in my lead position, so with new people coming in making a penny less than I’m making, I felt unappreciated.”

The union that represents Ms. Womack and other warehouse employees, Unite Here, renegotiated the differential during contract discussions with their employer, Centerplate, a unit of food-services and facilities management company Sodexo. In June, the parties agreed on a new contract that includes pay increases of at least $1.80 an hour for union-represented employees, the union said. Ms. Womack’s pay rose to $19.95 an hour.

“It has taken a lot of weight off my back,” said Ms. Womack, who said she now earns enough money to pre-qualify for a mortgage and hopes to buy a house soon. It has also changed her view of her job. Between the pay increase and new management at the stadium, she says of her work, “I’m loving it, honestly.”

In a statement, Centerplate said, “Our team in Seattle is committed to attracting and retaining the best local talent by offering competitive wages and a great place to work. This applies for new and tenured employees alike.”

Union contracts can make it tougher for companies to adjust pay to match short-term shocks, said Marrick Masters, a management professor at Wayne State University. Contracts typically lock in pay rates and raises for members. “You can’t give huge merit increases, you can’t give lots of promotions,” he said.

Wage compression also affects firms at the higher end of wage scales, especially when companies are hunting for highly-skilled workers and are willing to pay a premium to acquire them. Salaries rise for new recruits, creating compression within occupations, Cornell’s Dr. Burton said.

ADP found that wages rose an average of 9.8% for job-switchers in the information industry from June 2020, 7.8% for switchers in finance and real estate, and 9.6% for those working in professional and business services. Pay for workers in those industries who didn’t change jobs during the year rose on average between 3.7% and 4.7%.

Some companies are trying to ensure that incumbent workers don’t express their frustration by jumping ship. After all, Dr. Masters said, “one way of avoiding the wage compression problem is to just simply move from one company to another, and then you are in a much stronger position to negotiate a higher pay level.”

Executives at Detroit-based Ally Financial Inc. review pay on a quarterly basis and will boost compensation where necessary so that tenured employees aren’t falling behind newcomers, said Kathie Patterson, the lender’s chief human-resources officer. “It’s important in the spirit of pay equality,” she said.

Those adjustments matter even more at a time when workers are comfortable sharing information about their salaries, she said. “Everyone talks about their pay,” she said. “The new generation is very open about it, so making sure you have fairness and are able to justify and explain that is extremely important.”

Write to Lauren Weber at lauren.weber+1@wsj.com