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. Raphaely, now 43, 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. Wage erosion partly explains why the Federal Reserve Board openly frets about the threat of deflation, a downward spiral in prices that can cripple an economy by making debt repayment more difficult and encouraging consumers to wait for even lower prices. Adding fuel to the deflation debate, the cost of goods to both consumers and manufacturers fell in April, officials reported last week.
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.