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Researchers at the Federal Reserve Bank of San Francisco contend that many employers wanted to cut wages during the Great Recession but were unable to because of strong worker resistance. The behavior is called downward wage rigidity, which is the reason why paychecks haven’t grown commensurately with the recent improvements in the job market, the researchers wrote in their July 15, 2013, article, published on the bank’s website.
We are now likely in a period of “pent-up wage cuts” that never transpired during the Great Recession, according to the article, “The Path to Wage Growth and Unemployment.” This scenario has occurred after all three recessions since 1986, the researchers noted; but never to this degree, which is yet another reminder of the severity of the 2007-09 economic crisis.
In the absence of those wage cuts, businesses laid off more workers and hired at lower rates to control costs. Now, “as the recovery takes hold, businesses gradually reduce wage growth,” and “this gradual process can continue long after the unemployment gap begins to narrow,” explained researchers and article co-authors Mary C. Daly, Bart Hobijn and Timothy Ni.
Other recent reports bear out this trend of improved hiring activity and weak wage growth. As of August 2013, hiring in the service sector has increased for the past 13 months on an annual basis, according to the Society for Human Resource Management’s monthly Leading Indicators of National Employment (LINE) survey report. During that same time, hiring in the manufacturing sector has risen year over year in eight out of the past 12 months.
Yet, during that same period, service-sector employers that responded to the LINE survey increased, on a net basis, new-hire compensation in only three of the past 12 months; responding manufacturers increased new-hire wages in just four of the past 12 months.
The U.S. labor force has grown by an average of more than 200,000 jobs per month in the first half of 2013, according to preliminary U.S. Bureau of Labor Statistics (BLS) data issued in early July. Even so, the median weekly earnings of the nation’s full-time workforce were $776 in the second quarter, only 0.6 percent higher than a year ago and not nearly in step with the 1.4 percent inflation that occurred during that same three-month period of April to June, according to the BLS.
Many HR departments are “only looking at two numbers” right now, said Peter Kennedy, principal at PRM Consulting, a Bethesda, Md.-based HR consulting firm. Those numbers are a commonly cited 3 percent (or less) increase in salary budgets for 2014 and a historically low inflation rate that has remained below 2 percent.
Knowing that cost-of-living expenses are not rising dramatically and that there are still millions of people seeking work, companies aren’t feeling pressured to make significant increases to compensation, Kennedy said.
“Those numbers are holding everyone back,” he noted. “Except for the high-skill areas, there’s not enough demand [to increase wages]. There’s a lot of caution out there right now.”
Many businesses have come to view base pay and related annual increases as a fixed cost, much like defined benefit plans, explained Dan Ripberger, managing director of Cincinnati-based performance management and compensation consulting firm RSC Advisory Group. And as with defined benefit plans, the employer assumes the financial risk for future payments even if the organization’s performance is poor, Ripberger said.
Consequently, he said, more companies are moving toward variable pay systems—lump-sum benefits that are tied to an individual’s goal achievement—as opposed to steady, across-the-board annual salary hikes.
Employers shouldn’t exercise too much caution, though, particularly with top talent, Ripberger advised.
“I think slowness of base-pay increases postrecession has a lot to do with profit-taking by organizations,” he said. “In my view, this is a very bad, short-term approach that can erode away an employer’s [human capital] assets.”
For more information, visit SHRM’s Labor Market and Economic Data page.
Joseph Coombs is a workplace trends and forecasting specialist at SHRM.
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