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At the height of the COVID-19 pandemic in early spring, with revenues plummeting 70%, the CEO of the Dallas software company, Rishi Khanna, quickly decided to cut the salaries of its 12 employees instead. than to fire some of them.
The layoffs, he said, would have hurt the morale of ISHIR employees. In addition, he adds, “we didn’t want to lose any of our key employees.”
And with layoffs ravaging the economy, employees were receptive to pay cuts even though they were still spending 40 or more hours a week.
“I knew a lot of people who were already on leave or completely laid off,” says Bill Luisi, senior sales manager for ISHIR, who suffered a 20% pay cut. “I felt grateful to have an opportunity.”
The layoffs and time offs of more than 25 million American workers have naturally fueled most of the country’s anxieties over the coronavirus recession. But that’s not the only economic setback for workers: Many companies are cutting employee hours or wages to cut costs, either instead of, or on top of, job cuts. For workers, a smaller paycheck may be a welcome alternative to losing a job, but economists say it could still hurt consumer spending and the economy, and represent an even more lasting legacy of the recession as layoffs. .
Nearly half of the nation’s net job losses in early spring have been recouped, although it may take a few years for the rest to recover, economists say.
Still, “you’ll see employment recovering faster than wage growth,” says economist Dante DeAntonio of Moody’s Analytics.
Across the economy, most workers don’t see their wages go down, but they struggle with wage freezes or meager increases. From March to June, employers froze the wages of 58% of their workers, down from 36% in the same period last year, according to a recent study from the University of Chicago and the ADP payroll processor. In the second quarter, wages and salaries of private sector workers edged up 0.4%, the smallest increase in five years, according to the Labor Ministry’s employment cost index.
“Double whammy” for rehired workers
Those most affected by reductions in hours or wages are employees on leave who return to work, plunging them into financial crisis. And while reductions in hours – which of course translate into lower weekly paychecks – are more frequent, a historically significant portion of U.S. employers, like ISHIR, have taken the unusual step of cutting wages or reducing wages. hourly wages during the recession.
In April, the vast majority of unemployed Americans – 18 million – said they were on temporary layoff or on leave, according to Labor Department figures. About 40% of employees on leave have returned to work, according to Gusto, a provider of payroll and benefits services to more than 100,000 small businesses. Of those, 29% returned to fewer hours or lower wages, according to figures up to August that Gusto provided exclusively to USA TODAY. This compares to just 17% of a much smaller group of leave workers recalled during the same period last year.
Many workers have been recalled by restaurants or stores, for example, which closed mostly or completely at the start of the crisis and then reopened but without dining inside or at lower capacity and hours. limits. This reduced the hours and wages of workers.
“When they come back, it doesn’t mean they come back to a pink image,” says Sarah Gustafson, data manager at Gusto. “They’re sort of getting a double whammy.”
San Diego-based Positive Adventures, which hosts outdoor team-building and youth education events, put most of its nine full-time employees on leave in March when sales disappeared, said CEO Melissa Lopez. After securing a repayable federal loan, she brought home five of the workers and generated income through summer camps and virtual events.
But in July, after running out of federal money and with sales still down 80%, she cut their hours to 20 to 30 hours a week.
When she did, “I was so nervous I would lose people,” Lopez says. She says she expects to reinstate their schedules when they get back from business, although she doesn’t know when that will happen.
Julie Fry, 36, the company’s sales and marketing manager, has reduced her take-out ritual from two meals a day to one meal a day on weekends and removed frills such as going to hair and nail salons; and clothing purchases. Noting that her income is helped by independent social media projects, she says she wants to stay with Positive Adventures for the long haul because she believes in her mission.
“I just reset my expectations,” she says of her tight schedule and pay. “We know there is an end in sight.”
Among all workers, including those who were not made redundant or put on leave, 8.8% saw their hours cut in August, up from 6% a year earlier, according to data from Gusto.
Wage cuts are spreading
While lower-paid hourly workers are more likely to see their schedules, rather than hourly wages, trimmed, salaried employees are more likely to experience outright pay cuts, according to data from Gusto. This is in part because it can be difficult to calculate the hours of salaried employees who do not point a clock, says Daniel Sternberg, head of data science at Gusto.
Nearly 7 million workers suffered wage cuts from March to June, according to the University of Chicago and ADP study. Among employees who were not made redundant during that period, 6.2% suffered wage cuts, up from 1.6% during the same period last year, according to the study. During the Great Recession of 2007-09, 6% of workers suffered wage cuts, but many companies could cut wages further this year, the report said, suggesting that the eventual share could be much higher.
“Base wage cuts are a remarkable feature of the labor market in the pandemic recession,” the study says.
Traditionally, companies prefer to lay off some workers rather than cut wages in general, which usually hurts morale and prompts top employees to leave, says Sudarshan Sampath, research director for PayScale, a data and software company. compensation that advises employers. Layoffs, on the other hand, offer companies the opportunity to cut the underperforming, he says.
And while employee hours may be extended as business returns, wages may be more difficult to restore because “there is no such clear mechanism” other than employers who keep their word, says Moody’s DeAntonio. Pay cuts can also hurt morale by suggesting that workers are malfunctioning, Gustafson says.
But this crisis is different. The sudden and dramatic drop in revenues as states closed businesses in March forced many businesses to do whatever they could to survive. And many companies believed that “the impact of the pandemic on business performance would be short-lived,” Sampath said.
Well-paid workers take it by the chin
The highest-paid workers have been hit hardest by the pay cuts, with 13.4% of employees in the top 20% based on wages experiencing pay cuts between March and June, according to the University of Chicago-ADP study. With frequent layoffs, pay cuts at the top could represent “a sacrifice shared across the organization,” Sternberg says.
At the start of the crisis, a myriad of companies announced pay cuts for executives, including Delta, Marriott, Bed Bath and Beyond, Nordstrom and Macy’s.
Khanna, the CEO of software in Dallas, said he couldn’t fire mediocre employees at ISHIR because his company didn’t have one. And he couldn’t reduce the hours of the employees because they focus on doing projects for other companies and often spend more than 40 hours a week on it.
He decided to reduce the salaries of senior executives by 20%; middle managers by 15%; and lower level employees by 10%. He says he wanted to minimize the pain for young workers already facing relatively low wages.
Luisi, the sales manager, says his 20% reduction prompted him to postpone the planned renovation of his kitchen and living room – a $ 50,000 project – and the purchase of a new bike.
“I considered this to be an extraordinary time,” says Luisi, who has worked in the software industry for more than four decades and earns a six-figure salary.
While many workers accept pay cuts on the heels, stagnant wages or meager increases could be difficult for the economy to shake. Even after the country recouped all the jobs lost during the Great Recession in early 2014, modest annual wage growth of around 2% persisted for more than a year.
“We’ve had a long period of low inflation,” says DeAntonio, a dynamic that limits the ability and need for businesses to raise wages. “It is not an engine of strong wage growth.”