Posted by: adrienehill | February 25, 2009

Wages Rise…As Jobs Are Cut

James Surowiecki at the New Yorker has an article  that explains why average wages are rising…even as people are losing work. 

“This is the Age of the Incredible Shrinking Everything. Home prices, the stock market, G.D.P., corporate profits, employment: they’re all a fraction of what they once were. Yet amid this carnage there is one thing that, surprisingly, has continued to grow: the paycheck of the average worker. 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.

This combination of rising unemployment and higher wages seems improbable. But, as it turns out, it’s what history would lead us to expect. Even during the early years of the Great Depression, manufacturing workers actually saw their real wages rise, and wage cuts have been scarce in every recession since. Oil and wheat prices may rise and fall instantaneously to reflect supply and demand, but wages are “sticky”: even when the economy goes bad, it takes a lot to make them fall.”

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Responses

  1. One thing to point out is that while average wages may be increasing, that doesn’t necessarily mean that any one individual’s salary is going up. If a company cuts 1000 of its entry level workers, the average wage will probably go up, because it will be dominated more by the higher paid, more senior workers that are left.

    When GM lays off all of it’s manufacturing workers, and only has the CEO and executives left, you can bet that GM’s average wage will be higher.

    It’s certainly possible for layoffs to have the opposite effect as well: a company trying to cut costs by getting rid of highly paid, senior managers. I don’t know which one would be more common. All I’m saying is, if I hear that the average wage is going up right now, I’m still not going to conclude that anyone is getting a raise, at least based on what I’ve seen.

  2. I’m with Steve on this one, I think a lot of what we’re seeing is that the lower wage jobs are the ones being cut the most.

    Even if high and low wage jobs were being cut proportionally (say, 10% of low wage jobs lost, and 10% of high wage jobs lost as a simple example), there are a lot more low wage jobs to begin with, thus average wage would go up in this scenario.

    To really see what’s going on, you’d need year-to-year data for the surviving jobs, which would be harder to obtain. My intuition is that you’d see slower wage growth within surviving jobs during a recession, despite the average wage stats going up for the above reason.

  3. My company recently laid off a number of people to contain costs, and at the same time cut the wages of the remaining employees by 2%.
    If and when the time comes to hire people to replace those laid off, they will probably hire younger, cheaper laborers.

    The New Yorker article talks about rising productivity. But productivity has been rising for decades, with no comparable rise in worker wages for the the same period of time. If the minimum wage over the past 30 years had kept up with company profits, GDP and the other economic measures, the minimum wage would be about $19/hour.

  4. […] 26, 2009 · No Comments Yesterday I posted a story from the New Yorker about rising wages during economic recessions–there have been a […]


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