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?