Pay cut for many Americans
NEW YORK: Companies across the United States are cutting salaries as they fight to survive the coronavirus, upending a key assumption in modern economics and raising another hurdle to rapid recovery.
The hard numbers won’t be in for months, but anecdotal evidence is piling up. On earnings calls, big businesses including The Container Store Group and Lyft have cited what they said are temporary salary reductions.
Federal Reserve (Fed) officials also have found plenty of supporting evidence. The pandemic has triggered unemployment on a scale not seen since the Great Depression. Pay cuts for Americans who’ve managed to hold onto their jobs may hobble the return to normal.
People will have to use a bigger chunk of their income for fixed obligations such as housing and other debts – leaving less for the kind of spending that can help spark the economy back into life. “It’s one of the reasons why we don’t expect a so-called V-shaped recovery,” said Michael Gapen, chief US economist at Barclays Plc in New York. Americans taking pay cuts “might have little, and in some cases maybe nothing, left over after that for discretionary purchases”.
Outside of “high-demand sectors such as grocery stores”, there are signs of “general wage softening and salary cuts” all over the economy, according to a Fed business survey in April. A study by Thomvest Ventures found that non-executive employees had seen pay reduced by an average of 10% to 15%.
That’s not supposed to happen, according to ideas that have dominated economics for the better part of a century, since John Maynard Keynes unveiled his famous “General Theory” during the Great Depression. The phenomenon is known as “sticky wages”.
Employers may be able to cut inflation-adjusted pay by raising wages less than prices, the argument goes. But it’s harder to cut pay in nominal terms – in other words, by putting a smaller number on people’s paychecks.
That’s why supply and demand get out of balance in a slump, according to the so-called New Keynesian model that Fed officials and other policy makers lean on. It’s a justification for governments to intervene with stimulus, rather than just allowing market forces to play out until the economy finds a new equilibrium. The theory has largely held up in practice as well as on paper.
Truman Bewley, an economics professor at Yale University, wrote a whole book on the phenomenon – Why Wages Don’t Fall During a Recession – published in 1999. He conducted hundreds of interviews but said he essentially got the answer from the first person he talked to, a manufacturing executive.
“I asked: Why do you lay so many people off rather than reducing pay? And his answer was – I should’ve made it the title of my book – ‘to get the misery out the door’,” Bewley said.