Wages become the recession's latest casualty

April 04, 2009|By Jay Hancock | Jay Hancock,jay.hancock@baltsun.com

Bosses at Avatech Solutions thought they had to slash payroll after sales cratered, but when it came down to it they didn't want to lay off 35 or 40 people. So the Owings Mills company let half that many go and achieved the balance of the savings with a kind of cost-cutting not widely seen since the Great Depression: a pay cut for all remaining employees.

Many facets make this downturn unsettling and different: the collapse of Wall Street, the taxpayer dollars laid on the line, the depth of employment loss - underscored by Friday's report that in March the economy shed 663,000 more jobs.

Add another. Thousands of employees who have managed to hang onto their jobs are nevertheless seeing living standards and buying power decline with substantial, if maybe only temporary, wage decreases.

Avatech, a purveyor of engineering software and training, chopped pay by 10 percent this week from the chief executive to the administrative assistants. Towson-based Black & Decker just reduced base pay by 10 percent for top bosses and 5 percent for most other workers.Advanced Micro Devices, Hewlett-Packard, Federal Express, Honda and General Motors have announced broad pay cuts, some permanent. So have dozens of newspapers. Both my brothers - one in banking, one in building materials - just saw their pay go down.

For all these folks, it's as if Washington's recently enacted payroll stimulus didn't exist.

In the past, "there has been a sense that, of all the places you can look to achieve cost savings, salaries have been off limits," said Laura Sejen, a compensation expert at consultant Watson Wyatt.

But a Watson Wyatt survey of 245 big companies in February showed that 7 percent had cut salaries and 4 percent expected to.

"I wouldn't be surprised to see these numbers continue to increase over the balance of 2009, as the economy remains weak," Sejen said.

The March edition of the Federal Reserve's "Beige Book" of economic reportage found "outright reductions in hourly compensation costs" at companies across the country - a development not mentioned in previous reports.

Avatech opted for pay cuts rather than additional layoffs after seeing other companies make the same move. It has 195 workers.

"You get to the point where you start to dig into muscle, and you really don't want to do that," said Chief Executive Officer George Davis. Senior Avatech managers offered to take 10 percent pay cuts to make budget. "I said, 'You know, guys, that's just not enough,' " Davis said. " 'We're going to have to do it across the company.' "

At Black & Decker, "since we already had some employment-level cuts, we wanted to do this as an alternative and hopefully reduce the number of jobs that we cut out," said spokesman Roger A. Young.

Both Black & Decker and Avatech say they hope to restore pay when business improves.

Wage cuts aren't a pure negative. A 10 percent pay decline is better than the 100 percent a layoff brings. Economists have long argued that more flexible wages could reduce layoffs and shorten recessions.

But combined with this recession's job cuts, which have now surpassed those of the severe 1981 downturn as a portion of the economy, wage reductions seem to demonstrate deep weakness.

As much as anything, Fed Chairman Ben Bernanke is trying to avoid deflation - the prolonged and widespread decline in prices that characterized the Depression. Falling wages, which are the price of labor, are a deflationary symptom.

U.S. pay has been under pressure for years as competition from overseas workers reduced the demand for domestic labor. Also, soaring medical care costs have left less money for companies to boost take-home pay.

But widespread pay cuts would be a new phase. To be sure, so far there is no wage deflation in the official figures. Wages and salaries on average were 2.7 percent higher in the fourth quarter (not counting inflation) than a year earlier, according to the Labor Department's employment cost index.

The conventional wisdom is that wages are still what economists call "sticky" - unlikely to decline even with a collapse in demand for work. In hard times, the thinking goes, employers fear demoralizing remaining workers by cutting pay.

"Reducing the pay of existing employees was nearly unthinkable because of the impact of worker attitudes," Yale University economist Truman F. Bewley wrote a few years ago in Why Wages Don't Fall During A Recession.

I was unable to reach Bewley to see what he thinks now. Falling wages, however, are the latest of many once-unthinkable events telling us that this recession needs a new textbook.

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