Where Did My Raise Go?
Shrinking paychecks are the new reality for many Americans. Global markets and a weak economy are affecting the way we work–and how much we take home in our paychecks each week

Tod Raphaely was flying high four years ago when he was named European sales manager for Raltron Electronics and saw his salary rise to $115,000 a year. Now 43, Raphaely remained upbeat when the tech bubble began to leak air and he was reassigned to the Miami headquarters of the manufacturer of computer and cell-phone parts. He and his wife Wendy bought a condo and renovated the kitchen. He didn't panic when he and several other Raltron employees had their pay cut 10% in the fall of 2001 and another 10% the following spring. "We were hoping things would get better," Tod says. "So we continued to trudge on." But last fall Raltron slashed wages a third time–by more than 20% in Tod's case. He now makes $70,000 a year even though he has taken on additional duties. He and Wendy have cut household spending, but their credit-card debt–and their anxiety–is soaring. Tod says he is grateful just to have a regular paycheck.

Everyone knows about unemployment. But millions of working Americans are now facing a less familiar and perhaps more troubling problem: shrinking wages. It's a phenomenon that takes many forms. Some workers, like Raphaely, have had to swallow outright pay cuts. Others have lost their jobs and, in the tough labor market of today, have had to settle for new ones at less pay. Still others–including employees at such giants as AT&T, Boise Cascade and Starwood Hotels–have had to accept pay freezes that, when rising prices are factored in, amount to reduced compensation. To add insult to injury, companies everywhere are reducing bonuses and overtime and eroding health and pension benefits.

The numbers are grim. For the 500,000 workers laid off since January, the average job search has stretched to a 19-year high of nearly five months–about twice the duration of the typical severance package. According to outplacement firm Challenger, Gray & Christmas, 17% of those who do find work–nearly double the historical percentage–are settling for less pay. The net result of the various pressures on pay: in the first three months of 2003, median weekly earnings adjusted for inflation fell 1.5%, according to the U.S. Labor Department. That's the biggest drop since 1991, according to Jared Bernstein, an economist at the Economic Policy Institute, a research group based in Washington.

The no-raise economy is partly a predictable, temporary aftershock from the burst Internet bubble and recession. With core inflation (excluding food and energy) officially running at just 1.5%, workers are relatively well equipped to cope with stingy employers–particularly in an era of 0% auto financing and mortgage rates that last week dropped yet again to historic lows. Dramatically declining energy prices since the Iraq war ended are another welcome buffer, allowing consumers to keep more of what they earn.

But there is an unsettling permanence to the falling-wage trend, as companies hold the line on compensation so they can compete in an increasingly global economy in which low costs are key to survival. The ugly truth, which you won't hear on the campaign trail, is that even as economic growth picks up–as it surely will–there is not a lot that Washington can do to encourage employers to hand out more raises.

One job title defying the trend is CEO: pay for chief executives rose 15% in 2002, according to Equilar, a firm that studies CEO compensation. That amounts to about 200 times the pay of the average worker, up from 56 times in 1989, according to the Journal of Economic Issues. Investing legend Warren Buffett, who has been campaigning against executive compensation that is out of line with returns to workers and shareholders, said in a recent speech that "what really gets to the public is when CEOs get rich, really rich, and they get poorer."

Pay freezes and cuts in one company or industry are a necessary feature of healthy competition, but when they spread through an entire economy, it is cause for concern. Federal Reserve Chairman Alan Greenspan recently signaled that he was prepared to cut short-term interest rates for the 13th time since January 2001 to guard against a corrosive bout of deflation, like the one Japan has endured for nearly a decade. Wage pressures and deflation "obviously go together," says Laurence Meyer, an economist and a former member of the Fed's board of governors. "When there is slackness in the economy, it puts downward pressure on wages that then passes through to the price of goods and services."

President Bush's proposed solution is a package of tax cuts mainly for upper-income Americans. The current "recession mentality," he argues, has led to extensive corporate cost cutting and downward wage pressures that will abate as the economy revives. "When demand goes up, wages will follow," Bush says. No doubt faster growth, when it comes, will help boost employment and stabilize pay. But it is unlikely that wages will rebound quickly. The world has changed. The spread of technology and skills, of Internet communication and cheap shipping, means that today more U.S. firms must compete against foreign rivals that are more formidable than ever. And this requires holding down wages.

Is there anything American society can do about eroding wages? A major investment in public education is the best solution, says former Labor Secretary Robert Reich. The U.S. work force must stay a step ahead of the rest of the world "to make it possible for more Americans to be innovative and add productive value," he says. That's what keeps jobs at home–and wages going up. But it is a moving target. The world's work force, especially in India and other parts of Asia, is catching up in education. And as long as people there will work for less, wages here will remain under pressure even as the economy recovers.

—from TIME, May 26, 2003

Questions

1. What might suggest that the falling wage trend will be permanent?

2. Why might the Federal Reserve lower interest rates for the 13th time since January 2001?

3. According to former Labor Secretary Reich, what should American society do about eroding wages?