Wages grow for those with jobs, says US study

FedEx said in December that it would reduce the pay of salaried workers by 5 per cent. Caterpillar announced it would cut pay by up to 15 per cent. The employees of a General Motors dealership near Philadelphia agreed to work one week for minimum wage.

For the first time since perhaps the Great Depression, it seemed possible that average hourly pay would actually begin falling, even before inflation was taken into account. But that’s not what has happened.

Wage growth has picked up in the last several months, according to two different government surveys. You don’t hear or read nearly as many stories about pay cuts these days. Even though unemployment has reached its highest level in 26 years, most workers have received a raise over the last year.

That contrast highlights what I think is one of the more overlooked features of the Great Recession. In the job market, at least, the recession’s pain has been unusually concentrated. And it hasn’t been concentrated in the typical way. Nearly every region and every demographic group has indeed been affected. But the pain has been concentrated within groups.

People who have lost their jobs are struggling terribly to find new ones. Since the downturn began in 2007, companies have been extremely reluctant to hire new workers, and few new companies have started. The economy and the job market are churning very slowly.

“There are thousands of people applying for every job I’m looking at. And potential employers won’t even give me the courtesy of acknowledging I applied,” Rick Alexander, an unemployed master carpenter in Florida, told my colleague Michael Luo. Almost five million of the officially unemployed — those still looking for work — have now been out of work for 27 weeks or longer. In the six decades that the Labor Department has been keeping records, that group has never been a larger share of the work force than it is today.

Impact of recession
Yet there is a flip side to the lack of churn. Instead of doing lots of firing and some hiring, many companies have done only some firing and virtually no hiring, the statistics show. And that isn’t all bad.

Try thinking of it this way: All of the unemployed people in the country are gathered in a huge gymnasium that’s been turned into a job search centre. The fact that this recession is the worst in a generation means that there are many, many people in the gym. The fact that the economy is churning so slowly means that there is not much traffic into and out of the gym.

If you’re inside, you will have a hard time getting out. Yet if you’re lucky enough to be outside the gym, you will probably be able to stay there. The consequences of a job loss are terribly high, but — given that the unemployment rate is almost 10 percent — the odds of job loss are surprisingly low.

The reasons for the slow churn are obviously complex. The baby boomers are moving out of the ages at which people typically start businesses. The economy has shifted away from sectors, like manufacturing, in which temporary layoffs are common.

 Educational gains have slowed, which affects innovation. And the federal government was not willing, at least until recently, to make the kind of investments that spurred entrepreneurship in the past — building the highway system, supporting scientific research, creating the Pentagon computer network that turned into the Internet.
But whatever the causes, the effects of the slow churn are clear: the pain of this recession has been concentrated. That’s all the more true now that wages may be rising again.

The story about falling wages was — and remains — a reasonable one.
“There’s been a huge shift in power in recent years from labor to capital,” as the astute financial blogger Felix Salmon has written. Labor unions have shrunk, and companies can move operations to lower-wage countries. “Now that workers have lost their negotiating leverage,” Salmon wrote after FedEx made its announcement, “we might start seeing more across-the-board pay cuts. If the economy were to weaken again, we still might.”

So far, though, we haven’t. Between the collapse of Lehman Brothers last September and this June, the average weekly pay of rank-and-file workers (who make up 80 percent of the work force) remained stuck at about $612. Hourly pay rose a bit, but the increase was cancelled out by a shrinking workweek. Since June — with the economy apparently starting to grow again, as Ben Bernanke noted on Tuesday — the workweek has grown and hourly pay growth has accelerated. Last month, average weekly pay rose to $618.

Sticky-wage theory
Most companies have evidently decided that pay cuts aren’t worth the downside. Economists refer to this phenomenon as the sticky-wage theory, and it seems to have survived the Great Recession. The theory holds that executives of companies don’t cut pay, even when demand for labor has fallen. They worry that employees will become less motivated or start looking for another job, says Laury Sejen, who oversees the compensation consultants at Watson Wyatt. So companies instead lay off workers or stop hiring. They concentrate the pain.

The added wrinkle in this recession is that inflation has dropped below zero, thanks largely to a sharp fall in energy prices. In most recessions, inflation remains positive — indeed, higher than wage growth, which means that inflation-adjusted pay declines. In this recession, average prices have fallen 2 percent over the past year, while weekly pay has either been flat or risen 1 percent, depending on which data you believe.

So inflation-adjusted pay is up 2 to 3 per cent. Amazingly enough, that’s almost as big as the peak increases during the late 1990s boom. I realise how strange this sounds. (I work at one of the companies that did cut pay.) House values have sunk, and 401(k) accounts remain battered.

In the years leading up to the recession, pay increases for most families were meagre. The Census Bureau reported last week that median real household income — which, of course, includes households that have suffered a job loss — was lower last year than a full decade earlier.

But we’re still in unusual territory. The economy is just emerging from a severe recession, yet the pay of most workers has been rising. That wasn’t the case at the end of any other recent recession. I hope you can keep this in mind if you’re one of those fortunate enough to be outside the metaphorical gymnasium and still working. The economy surely doesn’t feel healthy right now. But just imagine how it feels to everybody who has borne the brunt of the recession.

New York Times