Earning Less Because of Recession

Wednesday, January 12, 2011

It should be no surprise that workers are earning less now because of the recession from which we’re still recovering. This is a tricky thing to quantify, for several reasons. For example, when you lay off a lot of low-skilled people, the average wage figure for those who are still employed actually goes up. However, if you look at the experiences of individuals over time, you’ll find lots of evidence that people are earning less, especially when they lose a job and take a new job.

This is the theme of a disturbing article in The Wall Street Journal:Downturn's Ugly Trademark: Steep, Lasting Drop in Wages.” The article offers several accounts of workers who lost good-paying jobs and are now working in positions such as Starbucks barista and school janitor.

The most obvious reason for this drop in wages is simple supply and demand. When the labor market is overcrowded with job-seekers, people who are being hired have less leverage to ask for good wages. Or you might phrase it this way: The large number of job-seekers effectively bid down the price that it costs to hire them.

This is also the conclusion of a blogger on the PayScale.com site. Using a measure of earnings that the site developed, called the PayScale Index, he shows the inverse relationship between this index and unemployment. The PayScale Index began to decline in the first quarter of 2009, just when unemployment jumped from about 6.5 to about 9.2. Just as unemployment has shown only tiny declines since then, so has the PayScale Index remained quite flat.

The drop in wages is particularly severe for people who are laid off, and this is not just a temporary effect. The Columbia University labor economist Till von Wachter and two colleagues analyzed Social Security data to explore the effects of the recession of the early 1980s. The researchers found (PDF) that earnings of those who were laid off improved somewhat after the initial drop in pay, which averaged around 30 percent, but did not return to pre-recession levels. Earnings remained 21 to 27 percent lower 20 years later.

To explain this drop, Von Wachter looked beyond the simple matter of an oversupply of job candidates. He believed that the stale skills of workers were (and are) also to blame.

Many workers who have held a job for a long time do not keep their skills current with emerging trends in their job. These are the workers whom employers most readily target when there is a need for layoffs. In other cases, workers have skills that are fully adequate for the job they hold, but the need for that job is declining. This is the case for jobs that can be replaced by automation or foreign workers. Workers in these jobs will need to shift careers before they can find work.

I should caution that it’s not fair to blame the victim of layoffs and pay cuts in every case, especially in such hard times as these. Some workers have lost their job even though they have excellent skills for their position and are working in a field that is in demand. They may be the victim of a mismanaged company that could have survived in normal economic times. Or they may be unable to relocate to find work because they can’t find a buyer for their house. So they end up taking a job at a lower skill level, and with less pay, than they are qualified for.

On the other hand, these unfortunate workers are the exception. Everybody has heard of someone who survived a traffic accident because of a seatbelt that was not buckled. However, the odds of survival are much better for those who do buckle in. Play the odds. Your odds of weathering a recession with a good job and good pay are better if you keep your skills up to date and work in a career that has a future. For some tips on these matters, I recommend my new book, 2011 Career Plan.


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