May 5, 2009 in Business

U.S. work force sees wages, hours trimmed

Compensation growth slows to 1982 levels as workers’ nest eggs suffer on stock market
Annys Shin Washington Post
 

WASHINGTON – In December, Timothy Owner, a trombone player with the Virginia Symphony Orchestra, called his landlord to tell her he might have trouble paying rent around May. He and the orchestra’s 53 other full-time members, many of whom are paid less than $30,000 a year, had agreed to a monthlong furlough.

The furlough, which ended Saturday, was rough, Owner said. But he and other musicians acknowledged that the alternative could have been worse. “We’re less unhappy if this means the orchestra will survive,” he said.

Across the country, workers’ earnings are stagnating or, in some cases, declining. For many Americans, the setbacks are all the more troubling because they have lost so much wealth in recent months, with the value of their homes and retirement packages plummeting.

Employers big and small have resorted to slashing hours and once-unthinkable wage cuts. In March, staffing agencies that work for Microsoft agreed to a 10 percent reduction in their bill rate. In April, hotel operators in New York City asked unionized waiters, housekeepers and bellhops to reopen their contract and accept wage cuts. State governments have frozen pay, while others have furloughed employees.

According to a recent Washington Post-ABC News poll, more than a third of Americans say they or someone in their household has had their hours or pay cut in the past few months. That’s a nine-point increase since a similar poll was conducted in February.

Wages in absolute terms – not adjusted for inflation – tend not to fall, even during economic downturns. In a study of the recession of the early 1990s, Yale economist Truman Bewley found that employers are loath to reduce wages because of the potential impact on morale and productivity. That’s why wages are considered “sticky” – they rarely slip.

So far, there’s no evidence that cuts to compensation have reversed overall wage growth. But, as in past recessions, the growth is slowing rapidly. The Labor Department’s employment cost index, which tracks wages, salaries and benefits, rose in the first quarter by the smallest amount since the index began in 1982.

That bodes ill for those workers trying to rebuild nest eggs depleted by the housing and stock market downturns. To boost their savings, they typically need faster income growth or lower spending, and, as Harvard University economist Lawrence Katz put it, “It is going to be a long time before we see sustained pay raises.”

The previous U.S. recession, in 2001, was relatively weak and didn’t last the full year. But once inflation is factored in, wages actually fell, sapping workers’ buying power, and didn’t return to pre-recession levels until 2006, just before the economy fell into its latest funk. As a result, from 2000 to 2007, the median income of American households, when adjusted for inflation, fell by $324, according to the Commerce Department.

By comparison, the current recession has already lasted 17 months and is far more severe than the last one.

Wages for new hires have already fallen, according to an index compiled by the Society for Human Resource Management, a trade association based in Alexandria, Va. Temporary workers’ hourly rates are shrinking, too. Joanie Ruge, senior vice president of the staffing firm Adecco Group North America, said her company’s clients have shaved as much as 10 percent off their rates.

In recent months, falling energy and food prices have helped Americans stretch their money. But inflation could easily erode those gains if it returns to a more normal annual rate of about 3 percent.

Experts fear that wages will not keep up. Once the recession ends, economists expect, the recovery will be long and slow, with sluggish job creation. Without a tight labor market, employers won’t have to compete as much for talent and workers will have less leverage to push for higher pay, experts say.

“Once you knock down wage growth, it will take a substantial change in unemployment to move it again,” said Lawrence Mishel, president of the Economic Policy Institute, a left-leaning think tank in Washington. “The recovery is going to be weak. I think as wage growth subsides, it is going to subside for many years.”

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