Compensation is an important factor to consider when developing a strategic personnel plan. Compensation planning is more important than ever during a downturn, as we’ve previously stated. Employees labor for the firm in exchange for compensation, while the company is made up of employees. This is true regardless of the economic situation at the time, and it is the main reason why salaries do not decline during a recession at least not uniformly.
This phenomenon is referred to by economists as “downward nominal wage rigidity,” or DNWR. The question that economists ask is why wages don’t fall in line with prices and demand. The answer is that they do, but only for a small number of organizations facing more difficult circumstances. Statistically, wages rise over time. Although wages can stagnate when the economy is in a slump, wages rarely fall.
This is true even during a global recession. For example, the Federal Reserve Bank found no evidence that the high degree of labor market distress during the Great Recession of 2007-2009 reduced downward nominal wage rigidity and some evidence that operative rigidity may have increased. In other words, wages do not go down when the economy goes down. There are many theories as to why this is, but the most compelling reason, according to the Federal Reserve, is that organ rigidity increases when the economy goes down.
Because most recessions last only a year or two, it would cost organizations more to reduce wages and lose productivity than to keep core employees happy and operate in a lean manner until economic conditions improve; however, this does depend on the type of workforce the organization employs; the more highly skilled and specifically trained the workforce, the greater the incentive the organization has to retain its people.
Are earnings reduced during a recession?
Why don’t earnings and incomes decline during recessions? This is a big subject in economics. Other prices, on the other hand, adjust more swiftly to reflect changes in demand and supply. Although economists have proposed a number of ideas to explain wage rigidity, none of them are satisfying.
During a recession, what happens to actual wages?
However, throughout the Great Recession and its aftermath, the economic pain was distributed more fairly, with salaries bearing the brunt of the burden. Since 2008, the average (median) worker’s actual wages have declined by roughly 8%-10% or about 2% per year behind inflation.
What effect does a recession have on wages?
Entering the labor market during a downturn can have a negative impact on a worker’s future earnings and job prospects. Many businesses avoid laying off workers during a recession, preferring instead to stop hiring new staff or hire them at reduced starting rates. This can be troublesome since a worker’s compensation conveys a message to employers and businesses about his or her productivity. Even if someone was hired during a recession, they will have a stigma attached to them that will last for years, making it difficult to recuperate payments that would have accumulated if the hire had occurred during a better economic period.
Do wages rise during a downturn?
In times of crisis, it’s sometimes the most reassuring to know that we’re all in the same boat. While we are all confronting the same broader threat of COVID-19, we are not facing it in the same way. Your economic and social well-being may be more uncertain depending on your work, industry, location, or other circumstances. The storm is the same, but the boat is different.
To understand how different areas of the economy are responding to the COVID-19 problem, we looked at pay increases in recent months across occupations, industries, and metro groups. Wage growth rates at 12-month and monthly intervals are discussed here.
We discovered that wage growth has slowed across all industries, occupations, and metro areas during the past 12 months. The average wage growth across industries was 1.6 percent between April 2018 and April 2019. However, it is only 0.5 percent between April 2019 and April 2020. However, this is the industry average. With a wage increase of 3.5 percent in the last year, the IT business has seen the most gain. Wages in retail and customer service fell by 4.1 percent over the same time, and by 8.8 percent in only the month of March. Energy and utilities, which have long been thought to have recession-proof revenue and rates set by regulators, saw the most pay growth in March, with a 2.1 percent increase.
Wage growth rates for sales, retail, and food service and restaurant occupations were -0.8 percent, -0.7 percent, and -0.6 percent, respectively, over the last 12 months. Retail and Food Service & Restaurant jobs were also among the worst-affected in March, with 3.4 and 6.6 percent salary drops, respectively. Wages in legal occupations, on the other hand, have dropped the most, by 7.3 percent. This might be the outcome of courthouses and other judicial systems coming to a halt as a result of COVID-19’s restrictions and safeguards. Over the same 12-month period, the fastest-growing occupations were information technology, transportation, and social services. Wages increased by 1.9 percent, 1.7 percent, and 1.7 percent, respectively, for these jobs.
The unequal negative impact on retail and restaurants is to be expected, given social isolation and a drop in consumer expenditure. Another factor to consider is that, while the wage decline is significant, it is also a result of looking at wages over shorter monthly periods. As we can see from previous recession statistics, wage stagnation around plus or minus 1% over longer durations is more common than a long-term wage decrease. There will be brief periods of negative wage growth, but historical recession evidence indicates that these losses will be recovered over time.
Between April 2018 and April 2019, the average pay growth across all metro regions was 3.1 percent. The average wage rise between April 2019 and April 2020 was a dismal -0.1 percent. In the last 12 months, Houston has been the hardest hit of all metro areas. Wages in the well-known oil metropolis have fallen by 3.5 percent since April of last year, with a flat 0.0 percent increase in March. Oil prices have entered unusually negative territory as a result of the Saudi-Russian pricing war and a shortage of demand owing to COVID-19. West Texas oil was priced at -$37.63 a barrel the week of April 20th, 2020. The oil market’s extraordinary conduct foreshadows an uncertain future for the Houston economy and other oil-dependent economies.
What are the three main reasons for unemployment?
1. Unemployment due to friction
This is unemployment caused by the time it takes people to transition from one job to the next, such as graduates or workers changing jobs. Because information isn’t perfect and finding work takes time, there will always be some frictional unemployment in an economy.
2. Unemployment caused by structural factors
This occurs as a result of a skill mismatch in the labor market, which can be caused by:
- Immobility in the workplace. This relates to the challenges of learning new skills suitable to a new industry, as well as technological development; for example, an unemployed farmer may have difficulty finding work in high-tech businesses.
- Geographical immobility is a term used to describe the inability to move from one This relates to the difficulties of relocating to a new place in order to find work; for example, while there may be opportunities in London, finding acceptable housing or schooling for their children may be tough.
- Changes in technology. If labor-saving technology develops in some industries, demand for some types of labor that have been replaced by machines will decline.
- Changes in the economy’s structure. Many coal miners were laid off as a result of the downturn of the coal mines due to a lack of competitiveness. They did, however, have difficulty finding work in new fields such as computers.
3. Unemployment on a traditional or real-wage basis:
- When wages in a competitive labor market are pushed above the equilibrium, for example, when the supply of labor (Q3) exceeds the demand for labor (Q2), unemployment results.
- Minimum wages or trade unions could boost wages above the equilibrium level. Unemployment in this state is frequently referred to as “disequilibrium” unemployment.
4. Unemployment by choice
This occurs when people opt to remain jobless rather than accept available positions. If benefits are generous, for example, people may decide to stay on benefits rather than work. Frictional unemployment is a form of voluntary unemployment in which people choose to wait until they can find a better job.
5. Unemployment due to a lack of demand or “cyclical unemployment”
- When the economy is not operating at full potential, demand deficient unemployment occurs. In a recession, for example, aggregate demand (AD) will fall, resulting in lower output and negative economic growth.
- Because they are creating fewer things, corporations will employ fewer workers as output falls. Furthermore, some businesses will fail, resulting in large-scale layoffs.
This demonstrates that cyclical forces have been the leading cause of unemployment in the United Kingdom. The UK economy faced deflation and slow growth throughout the 1920s. The Great Depression of the 1930s aggravated this.
Unemployment remained low during the postwar period of economic expansion until the early 1980s recession. Due to supply-side reasons, the natural rate of unemployment increased throughout the 1980s (structural factors)
Why do minimum salaries cause wage stagnation?
Why is it that the minimum wage causes wage stagnation? Employers have a hard time finding people ready to work for minimum pay. Paying low-skilled workers more than the minimum wage is not economically feasible for a business. When wages are low, there is a greater need for additional workers.
During a recession, why do wages fall?
- Increased labor market flexibility, including more zero-hour contracts, the emerging gig economy, and workers’ limited bargaining leverage.
- Increased inequality as a bigger proportion of GDP growth is allocated to pensions and corporate profits rather than wages.
- Productivity growth is slowing, resulting in slower economic growth and less room for wage rise.
- Net migration has been blamed for sluggish wage growth, particularly among unskilled employees.
- Growing wealth disparity has a knock-on impact (e.g., cost of housing associated with rising house prices)
International real wage growth
Prior to the global financial crisis, median real pay growth in the United States was stagnant.
In the 1980s and 1990s, the UK saw high real wage growth, but since 2008, it has seen dramatic declines.
More detail on factors causing falling wages
1. The Great Recession
Part of the cause for dropping salaries is the recession of 2009 and the accompanying increase in unemployment. Wages are under pressure because there is less demand for workers. Earnings typically fall during recessions; however, when compared to prior recessions in 1981 and 1991, the drop in wages is much steeper and lasts much longer. Furthermore, the decline in unemployment since 2012 has not been accompanied by an increase in real wages.
One theory suggests that declining real wages are to blame for unemployment falling faster than in prior recessions. Firms have been able to boost employment by offering lower salaries as a result of increased wage flexibility.
- Trade unions are on the decrease. The density of trade unions in the United Kingdom was 58.3 percent in 1979. By 2013, the figure had dropped to 25.6 percent.
- Part-time, self-employment, and flexible working patterns are on the rise. See also: The Effects of the Gig Economy on Wages.
All of these developments boost wage flexibility while reducing workers’ ability to bargain for higher salaries. Many of these labor market changes occurred in the United States before they reached the United Kingdom, which could explain the 1980s’ low median pay increase in the United States.
Changes in the economy’s structure reflect changes in the labor market. Manufacturing jobs have declined in the United Kingdom and the United States, while service sector jobs have increased. There are two key reasons for the fall in manufacturing jobs:
- Many manufacturing processes have moved to China and Asia due to a shift in comparative advantage.
The loss of well-paid, unionized physical labor has hampered the prospects of unskilled employees, many of whom are men. There are new opportunities in the service industry, such as transportation and retail, but these are generally underpaid.
Since 2008, there has been an extraordinary drop in labor productivity, with productivity in the United Kingdom barely returning to pre-crisis levels. Furthermore, UK productivity is 30% lower than that of our key competitors, Germany, France, and the United States. (link)
The United States has done no better, with only a 2% increase in labor productivity between 2010 and 2016. (US Productivity)
It’s no surprise that employers have been hesitant to raise salaries due to stagnating labor productivity. Firms may be able to pay greater wages when labor productivity rises.
Despite low productivity growth, wages have fared even worse, with the pay-to-productivity mismatch widening. In other words, a lower portion of a company’s revenue is spent on labor. Rising pension provision, a bigger percentage of firm profit, and increased CEO pay all contribute to the discrepancy. (See: Increased profit retained by the corporation.)
The disparity between productivity and wages has not resulted in increased investment in the UK, which remains at low levels.
Average (mean) earnings in the United States have outperformed median wages (workers in 50th decile). This is due to strong wage growth among the top 1% of earners, which raises average (mean) wages but does not raise pay for median workers.
Net migration statistics are frequently scrutinized during periods of falling real wages. Net migration to the UK has reached new highs in the recent decade, with almost half of all newcomers coming from the EU. Net migration from low-income nations is thought to put downward pressure on UK wages, particularly for unskilled workers.
According to a Bank of England research published in December 2015, immigration has had little impact on average salaries in the broader economy. They did, however, find a slight effect for semi/unskilled service sector employment, with a 10% increase in migration resulting in a 2% drop in salaries. Bank of England Report
Allowing for this, we may calculate that, over an 8-year period, the impact of migration on the salaries of UK-born workers in this industry has been around 1%, according to the new report. NIESR
The effect of immigration on salaries has political ramifications. Especially when weak productivity and labor market shifts are often overshadowed by immigration.
Although wage growth has slowed since 2008, there have been many earlier periods in history where large levels of immigration were associated with rising wages, such as the early 2000s until the credit crisis.
Wages are declining due to a variety of issues, not only in the UK but throughout the developed world. Poor productivity and changes in labor markets that lead to increased wage flexibility are the most convincing arguments. Inequality is also a key issue, making sluggish wage growth more problematic as the low-paid watch others in society take a larger portion of the pie.
Unfortunately, many of the structural issues that contribute to low pay growth are not likely to change very soon, implying that low wage growth may persist for some time. When poor income growth is combined with increased living costs particularly housing for young people the situation becomes even more challenging.
What is wage stagnation?
Sticky wages, on the other hand, occur when workers’ incomes do not respond fast to changes in the labor market. This might stymie the economy’s recovery from a downturn. When a good’s demand falls, its price usually falls with it.
Why are wages going down?
Despite the fact that the shift in the mix of employed workers toward higher-wage workers obscures the picture of how wages have changed during the epidemic, it is feasible to obtain insight by looking at the change in earnings for the same people across time. The incomes of many workers are recorded in the federal household survey data used in this analysis at two points in time a year apart. The employed employees’ sample is a subset of the entire sample, which varies due to the addition and departure of some survey respondents. It provides a different perspective on how earnings changed during and after the COVID-19 recession.
In the second quarter of 2020, the median wage of the changing sample of employed workers the whole cross-section of workers by quarter had climbed to $23.19. This was a 10.2 percent rise over the median wage in the second quarter of 2019. The median wage for a matched sample of employed workers the same workers across time climbed by 4.2 percent during this time, from $23.15 to $24.12. While both samples show higher wages in 2020 despite the pandemic, the much larger gain in the varied sample indicates that the loss of lower-wage jobs played a significant part in driving up the increase in the median.
Regardless of the sample, employed workers’ incomes in 2020 were greater than in 2019, albeit less so as time passed. The early gain in the median wage of the varied sample of workers slowed as the unemployment rate fell throughout 2020. Employed workers in both samples earned around 5.5 percent more in the fourth quarter of 2020 than they did in the fourth quarter of 2019. Despite the pandemic and a slowing economy, most workers will see better incomes in 2020.
Those gains, however, were short-lived. The matched sample of workers’ median wage in the first quarter of 2021 was 2.9 percent more than their wage in the first quarter of 2020. However, by the second quarter of 2021, the matched sample’s median wage had declined by 0.7 percent, whereas the varied sample’s median wage had fallen by 6.1 percent. The bigger drop in the varied sample is due to a shift in the composition of employed employees, this time toward lower-wage workers.
Inflation-adjusted salary declines are largely related to an acceleration in consumer price growth in the United States in 2021. Consumer prices rose 1.4 percent between 2019 and 2020, compared to 2.3 percent between 2018 and 2019. Workers will be able to maintain better earnings in 2020 as a result of this. However, consumer prices increased by 4.8 percent in the second quarter of 2021 compared to the second quarter of 2020, indicating that inflation is on the rise. As a result, worker salaries have been declining in recent months, including for the matched sample of workers.
Earnings changed similarly for high- and low-wage workers from 2019 to 2021, leaving inequality unaffected
From 2019 to 2021, the incomes of low-wage workers (those in the first quintile of earners) and high-wage workers (those in the fifth quintile of earners) grew in lockstep. The only exception is a decrease in the first quintile’s median pay in 2020, when the jobless are included in the sample.
In the second quarter of 2020, the median wage of low-, middle-, and high-paid workers all climbed, followed by a little dip. The median hourly wage for high-income workers went from $50.59 to $52.68 over the two-year period from the second quarter of 2019 to the second quarter of 2021, while the median for low-wage workers increased from $10.79 to $11.70. Overall, salaries for employed workers in all three income groups are marginally higher in 2021 than in 2019.