America’s hidden economic crisis: Widespread wage cuts

Other estimates put it higher: Roughly 7 million workers have likely received a dock in pay, according to Mark Zandi, the chief economist at Moody’s Analytics. Combined with those who have been forced to log fewer hours, the number climbs to 20 million people — or 1 in 8 workers — who have seen their paychecks shrink over the past few months even as they continued to work, underscoring how much harm shutdowns have caused beyond layoffs alone.

“We have an income crisis that is even larger than a jobless crisis,” Claudia Sahm, director of macroeconomic policy at the Washington Center for Equitable Growth, wrote on Twitter recently.

“There’s so much that falls under that,” Sahm, who previously worked at the Federal Reserve, said in an interview, referring to the “income crisis” label. “There’s these massive job losses. There’s hours being cut, overtime being lost. And then on top of that — and this is something we just really haven’t seen at all — is a large fraction of workers taking cuts in their wages.”

Notably, the cuts are mostly hitting higher-wage workers, who tend to be more shielded from the effects of a downturn. And smaller paychecks, even in the short-term, lead to less spending, extending any recession.

“The speed of a recovery is really directly aligned to how consumers are behaving,” said Jane Oates, a former Labor Department official who is now president of the nonprofit WorkingNation. “And if people don’t have money, they’re not spending it.”

The trend also suggests that employees feel they have no better options than to accept less money for the same work. Americans believe they have a less than 50 percent chance of finding a new job within three months if they became unemployed today, according to a New York Federal Reserve survey — a drop of more than 16 percentage points from a year ago.

It spells trouble for employers, too, who have historically avoided pay cuts because of the damage they do to employee morale and company productivity. But a drop in wages is twice as likely now as it was during the Great Recession, according to the study of ADP data, likely signaling that employers felt they had no other choice if they wanted to keep their doors open.

Jamie Vagedes, an accountant for the travel rewards company Maritz Motivation in St. Louis, took a 20 percent pay reduction in April that he thinks could remain in place at least another three to six months. The company, which partners with hotels and rental car companies that have been brutally hit by the pandemic, has already laid off or furloughed roughly a quarter of its staff and has not given a time frame for reinstating incomes for those who remain.