The Wall Street Journal has a piece in Saturday detailing the downward spiral of wages in the private sector. The deflationary spiral we are starting to enter will need to be stopped soon or the consequences, in my opinion, will be catastrophic. From the Wall Street Journal:
In addition to layoffs, companies are increasingly trimming wages, a tactic economic historians said hasn’t been wielded broadly since the Great Depression.
Heavy equipment maker Caterpillar Inc. announced in late December it would cut executive pay by half, and many salaried employees would see cuts of as much as 15%. Hutchinson Technology, a Hutchinson, Minn., maker of disk drive components, cut salaries 5% for employees who remained after a round of layoffs concluded this week. In Galveston, Texas, police and firefighters unions agreed to a 3% pay cut as the city grapples with the recession and the aftermath of Hurricane Ike.
Saks Inc. plans to eliminate 1,100 jobs, or 9% of its work force, and slash its capital expenditures. In addition, the luxury retailer will eliminate 2009 merit-based wage increases. Saks will also suspend matching contributions for 401(k) retirement accounts for at least a year and suspend benefit accruals for the few remaining employees in its pension plan.
The drive towards layoffs and salary reductions is not limited to a few. Fed surveys and business organizations are reporting that the reduction in salary tool has not been used this much since the Great Depression.
The Federal Reserve reported this week in its survey of economic activity that companies around the U.S. are considering freezing or cutting pay. The Fed’s survey of 12 districts, known as the Beige Book, cited examples in the Boston, Chicago and San Francisco regions.
In a recent poll by human-resources consulting firm Watson Wyatt, 5% of 117 companies surveyed said they had reduced salaries to cope with the recession; 6% plan to do so in the next year. Meanwhile, 7% of 805 small businesses surveyed recently by the National Federation of Independent Business said they had reduced salaries. The percentage of companies cutting salaries has never been higher than 4% since the survey began in 1973, said William Dunkelberg, chief economist for the NFIB.
We have seen prices fall, with some commodities in a free plummet. And while that may be a good thing in some respects, it holds great danger if it continues unabated. As companies get rid of labor and trim the wages of those remaining the lessened buying power of the market forces more cutbacks, and our spiral has begun.
But falling prices bring their own troubles, as employers make up for revenue declines by trimming wages. Employers in recessionary times always feel compelled to squeeze more from less. But with the job market so weak, employees appear more willing to work for less pay than leave behind pensions and health care coverage to brave the worst job market in a generation. For companies with a unionized labor force, the very real prospect of bankruptcy has eroded much of the remaining power of collective bargaining.
With industrial production in free fall that sector of the economy has much excess capacity, and that means further plant closings and layoffs. The news from that sector is bleak.
Production at the nation’s factories, utilities and mines fell by 2% in December from the previous month, the Federal Reserve said Friday. Manufacturing production fell 2.3% and was down just under 10% from December 2007 — the worst yearly drop since 1975. Manufacturers are using just 70.2% of their current capacity, as of December, suggesting further plant closings, lay-offs and other cost-cutting measures in the coming months.
The Journal even points to small business asking for wage concessions, and getting them.
Sarah McGee, owner of Visual Changes Salon and Spa, in Ellicott City, Md., has seen sales fall 10% from the summer, as their customers stretch out hair appointments and do their nails at home.
Labor represents about half of Ms. McGee’s costs, so she recently cut wages for two of her nine employees. A nail technician’s wage fell to $9 an hour from $10; another who performs facials and body waxing fell to $14 an hour from $17.
With the banking sector now teetering again this situation is about to get a whole lot worse before recovery can take place. And I cannot see how this situation is fixed without a fundamental change in how the federal government is handling bank recovery. That is a story for another post, but worldwide banking is still frozen, and some sectors are begining to crater, presenting a systemic threat to the world’s financial system. Hank Paulson has fumbled the first part of TARP. We had better not fumble TARP part two.
Bill Manzi.com 