It sounds counter-intuitive. But during recessions average wages tend to rise. Unusually, in this recession, in the USA, productivity has also risen – by 3.1 percent during Q4 2008 (a year into the recession).
James Surowiecki in The New Yorker explains
Companies are slashing payrolls: 3.6 million people have lost their jobs since the recession started, with half of those getting laid off in just the past three months. Yet average hourly wages jumped almost four per cent in the past year. It’s harder and harder to find and keep a job, but if you’ve got one you may well be making more than you did twelve months ago…
It’s not because businesses are generous that wages are sticky; it’s because employers are worried. In part, bosses are afraid of what economists call “adverse selection”: if they cut wages, it’s the least productive workers who would be the most likely to stay, while the best workers would start looking elsewhere. (Even in a weak economy, businesses still compete for talent.)
And although Surowiecki doesn’t directly mention it, this recession has the added anxiety for many businesses of talent shortage. Now that it is tougher to bring in foreign talent to the U.S., the need to retain existing productive, creative people may be bigger than ever in some industries. And attracting and retaining the best people would be tough if widespread wage cuts were occurring as this tends to undermine the entire workplace productive process. Surowiecki again:
After the 1990-91 recession, the economist Truman Bewley interviewed managers and labor officials at more than two hundred companies and found that most believed that wage cuts wreck employee morale and eat away at productivity. Whatever money they’d save by cutting wages, bosses assume, would be cancelled out by the decline in effort and the breakdown of trust that wage cuts would create.
Apparently layoffs are less damaging to morale than paycuts. Those laid off leave and take their “misery” with them. Presumably good Human Resource management can help the remaining staff bond together to help the company survive.
That productivity has been on the rise this recession may suggest that Human Resources departments are indeed helping to keep morale high. It also may be that certain layoffs may have targeted those workers who dragged down morale and productivity (it’s easier to lay people off than fire them, legally speaking).
The above story contains U.S. data and examples. Tavia Grant in the Globe and Mail published an article Saturday with anecdotal stories of some Canadian organizations requesting pay cuts, arguing that in this recession things are different.
Based on the above, I’d wonder how “forward thinking” or long-term viable these firms are – is cutting pay a last, final step before bankruptcy? And, I’d stress that I believe there is a big difference between asking or requiring people to reduce their hours or work a four-day week, and asking them to reduce their pay without cutting hours – however, feel free to disagree.
Is your workplace feeling more productive or perhaps “efficient and focused” in recent months? How are wages holding up?
March 16th, 2009 at 11:41 am
Just found some Canadian data on this from the Conference Board of Canada:
“In February, the 3.9 per cent increase in average hourly wages far outstripped the meagre 1.1 per cent rise in inflation.”
from: http://sso.conferenceboard.ca/e-Library/LayoutAbstract.asp?DID=2970
March 16th, 2009 at 12:05 pm
I’ve heard of company workers who have requested pay cuts in order to maintain the jobs of support staff. While this could be seen as being altruistic, the bottom line is that without available support staff, those remaining workers would have to pick up (even more of) the slack. A local hospital resorted to pay cuts, and a nurse commented to me that she was thrilled, because the slight pay cut meant that her aides and housekeepers (and other low wage employees) would stay. The hospital had already seen frontline staff cuts- so she was already carrying a greater patient load. The last thing she needed was to start mopping the floors and cleaning rooms on top of her excessive patient load.
Productivity may have increased, but at what price and for how long can this be sustained?
March 16th, 2009 at 4:20 pm
My simple understanding of productivity is to divide operating income by number of employees. A dramatic reduction of number of employees increases productivity, a dramatic reduction in income decreases it. So employees are decreasing 3.1% faster than income.
The problem is the tendency to eliminate employees that are working on future innovations or sources of productivity. Some companies are cutting R&D to help their immediate bottom line. This is an opportunity for companies that can afford it to invest while the competition cuts back, positioning them to take advantage of the eventual recovery. Apple may come out of this stronger?
I’ve seen this in my own family. One son-in-law was laid off, then hired back to do what were previously two jobs, probably a productivity increase. Another son-in-law had his 100-person division eliminated, he was one of a dozen who were kept and moved to other projects. If the old division would have created new products, this may have been short sighted.
March 16th, 2009 at 5:31 pm
Yes, I agree, why is productivity going up a shock? Fewer workers means the remaining workers are busting their butts.
And somehow, I can’t view this as a good thing, nor sustainable. We were already working the most hours in the world.
When do people just snap? And does anyone care?
March 16th, 2009 at 5:31 pm
I think there is also a bit of a double bind at work here = people get laid off so there is some thought that the remaining survivors will be more ‘creative’ as they try to do two jobs at once – completing denying the depression that survivors face…. so while necessity may be the mother of invention, you have to be feeling positive to see the creative jewels laid out before you….. and then there is the counter argument of course, that the more creative you are, the more likely you are to retain your job in the first place, with the very real caveat that people value creativity. Unfortunately, in my experience, it has been the creative ones cut first, because in a downtown the last thing corporate needs is for someone to ask why? or even why not?
March 16th, 2009 at 8:06 pm
Wendy’s original post was also about wages. I didn’t ask, but I wouldn’t be surprised if my one son in law, now doing two jobs, got a “raise” and promotion. Not a bad thing as my daughter, his wife, got laid off last month.
I don’t know about the other one, his transfer was more lateral but could have included a raise of some kind. He’s mostly talked about being glad he was retained, although as Wendy suggests, he’s also looking elsewhere.
March 19th, 2009 at 3:28 pm
Perhaps it is the principle behind the conjecture that the rich get rich and the poor get poorer.
March 19th, 2009 at 11:04 pm
They certainly did between 2000 adn 2008.
March 21st, 2009 at 1:10 pm
It is called fear. I cant blv this is framed as a good thing. if anything, this type of thinking got us into all this trouble in the first place. what about as many pl working at decent hours and at a decent wage as possible? novel concept.