SHRM LINE: Signs of Wage Stagnation, Deflation?

By Maria Williams Mar 6, 2009

Results of SHRM’s Leading Indicators of National Employment (LINE) March 2009 survey sound many familiar somber notes: Compared with the LINE results of March 2008, the current LINE report reveals plummeting hiring expectations for March 2009, sharply falling recruiting difficulty in February, curbed wages and benefits packages for new hires, and decreased job vacancies. This month, SHRM Online takes a closer look at the new-hire compensation indicator and whether it might portend worsening wage and compensation stagnation—and possible deflation.

For the fifth consecutive month, in both the manufacturing and service sectors, the LINE survey has shown new-hire wages and benefits packages to be growing more slowly than they were during the same month of the previous year. In the manufacturing sector, a net total of just 0.2 percent of respondents said they increased new-hire compensation in February (2.4 percent increased, 2.2 percent decreased). In the service sector, a net total of 4.0 percent lowered new-hire compensation in February (1.4 increased, 5.4 percent decreased). Responses for February 2009 from both sectors are four-year record lows for this indicator.

Jennifer Schramm, SHRM’s manager of workplace trends and forecasting, notes the correlation between recruiting difficulty and new-hire compensation: “HR professionals are having few if any problems finding people for their open positions, and this is likely to continue to weaken the new-hire compensation rate,” she said.

From one perspective, decreases in new-hire compensation and other cost-cutting measures might not be a bad thing. “As the business outlook remains challenging, employers are buckling down and making hard decisions,” said Laurie Bienstock, U.S. strategic rewards leader at global consulting firm Watson Wyatt, in a Feb. 25 press statement about current cost-cutting strategies. “This may be good news as companies move more toward cost-cutting efforts other than workforce reductions in an effort to hold on to the workers they will need when recovery eventually comes.”

Steven Director, economic advisor for the SHRM LINE and professor and associate dean for the School of Management and Labor Relations at Rutgers University, expressed a similar view: “The LINE data show that wage growth is slowing, but that’s not all bad. In many corporations, the modest wage increases were offset by increases in productivity (output per hour). Most corporations became leaner and more efficient. The major exception to that pattern was durable goods manufacturing. In that segment, the problems of the auto manufacturers and others actually caused productivity to fall for the first time in years.”

Wage Stagnation: A Long-Term Problem

On the other hand, insofar as new-hire compensation decreases portend wage deflation, this essential LINE indicator might reveal deterioration of an already festering problem. Whether or not wage deflation has taken hold, what’s certain is that wage stagnation is not new.

According to an April 9, 2008, article in The New York Times, in every economic expansion during the past 50 years—except for the one that ended in 2007—“incomes rose significantly.” By contrast, incomes shrank by about 1 percent during the most recent economic expansion, the article noted. And as early as January 2006, The Economic Policy Institute (EPI) noted that “despite strong growth in labor productivity, hourly wages for most workers are not keeping pace with inflation.” EPI attributed the problem to “a one-two punch of slower nominal wage growth for middle- and low-wage workers and faster inflation.”

More recently, in November 2008, Michael Mandel, chief economist of BusinessWeek,decried wage stagnation as a serious issue, in response to Bureau of Labor Statistics (BLS) data that real wages and salaries had dropped by what Mandel characterized as “an astonishing 1.8 percent” in the third quarter of 2008 compared to a year earlier. “In fact, real wages and salaries peaked in 2003 and have been trending downwards since then,” he noted. “I consider this to be an absolute critical fact in understanding the current financial crisis. In fact, Americans were borrowing so heavily because their real wages were declining.”

However, Director pointed out that the most recent BLS data, for the fourth quarter of 2008, showed real-wage increases from a year earlier. “From the workers’ perspective, real wages were up in the fourth quarter of 2008 compared to a year earlier,” he said. “The purchasing power of workers was up because prices increased even more slowly than wages. That makes things a little easier for those who have managed to hang onto their jobs.”

Wage Deflation: Happening Now?

Some commentators have pointed to recent furloughs by several major employers as evidence that wages might no longer be stagnating but possibly trending toward deflation. Through June 2009, the Maryland Board of Regents has imposed mandatory unpaid leave of two to five days as an alternative to laying off any of the Maryland University system’s 22,500 full-time employees. The Board of Regents decided to take a tiered approach, requiring five-day furloughs for the highest-paid employees and only one- or two-day furloughs for lower-paid employees. Also, to avoid layoffs, Gannett, the country’s largest newspaper publisher, is forcing most of its 31,000 employees to take one week of unpaid leave in the first quarter of 2009.

Attempting to reduce California’s $42 billion budget shortfall, Gov. Arnold Schwarzenegger has ordered more than 200,000 state employees to take off two Fridays a month, thus cutting the average employee’s salary by 9.2 percent.

David Frum, a resident fellow at the American Enterprise Institute, doesn’t use the “D” word, but he does see wage stagnation as a deepening problem. On Jan. 21, 2009, he outlined two solutions for American Public Radio’s Marketplace program: “The first is to reduce immigration flows. The arrival of more than a million very low-skilled workers, year after year—at least half of them illegal—has weighed heavily on the wages of less-skilled Americans. The second is to throw open the national health care market to brisker competition,” he said. “Right now, health care is regulated both by the federal government and the 50 states, with many states regulating in ways that drive prices up, not down.”

More March 2009 Line Survey Indexes

Every month, the LINE survey queries private-sector human resource professionals at more than 500 manufacturing and 500 service companies on four key areas: recruiting difficulty, employers’ hiring expectations, new-hire compensation, and job vacancies. Together, the manufacturing and service industries employ more than 90 percent of the nation’s private-sector workers. Among the other report highlights:

Hiring expectations. In March a whopping net 19.6 percent of manufacturing respondents plan to decrease their payrolls (15.3 percent increasing, 34.9 percent decreasing), dramatically reversing the trend of just a year earlier when a 31.8 percent net total of respondents were hiring.

Likewise, service sector hiring is down sharply from a year ago, but so far the trend isn’t as severe as it is for manufacturing. For the second consecutive month in 2009, more companies will increase their payrolls than will decrease them (25.7 percent increasing, 17.2 percent decreasing), with a net total of 8.5 percent increasing. Still, that net is quite down from March 2009 when a net total of 26.4 percent were hiring.

Recruiting difficulty. For the first time in four years in February 2009, LINE responses were in the single digits for those reporting greater recruiting difficulty. In the manufacturing sector a net total of 22.7 percent of respondents reported less difficulty in recruiting in February (1.8 percent, more difficulty; 24.5 percent, less difficulty). In the service sector, a net total of 26.2 percent reported less recruiting difficulty (3.1 percent, more difficulty; 29.3 percent, less difficulty).

Job vacancies. In February 2009, both exempt and nonexempt job vacancies showed net declines in both the manufacturing and service sectors. A net total of 6.1 percent of manufacturing respondents reported decreases in exempt vacancies (10.5 percent, increases; 16.6 percent, decreases). In the service sector, a net total of 8.0 percent of respondents reported decreases in exempt vacancies (7.8 percent, increases; 15.8 percent decreases).

With regard to nonexempt vacancies in February 2009, a net total of 8.1 percent of manufacturing respondents reported decreases in nonexempt vacancies (12.6 percent, increases; 20.7 percent, decreases). In the service sector, a net total of 1.4 percent of respondents reported decreases in nonexempt vacancies (20.3 percent, increases; 21.7 percent decreases).

Maria Williams is a staff writer for SHRM Online.

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