Pay cuts and Job Cuts...

The WSJ reports that "More Firms Cut Pay to Save Jobs -Possible Casualties Range From Workers' 401(k)s to Importance of Unemployment Rate." According to the article, "Pay cuts, rather than layoffs, have emerged as an alternative way for many companies to reduce labor costs as demand slumps during the recession. If enough companies use pay cuts to avoid layoffs in the future, then the unemployment rate may no longer give a true reading on how workers are faring. Employees, who have relied on pay raises to increase spending and boost their 401(k) contributions, would no longer be able to count on more cash in their paychecks over time. Even Social Security benefits down the road could be less than anticipated if annual salaries zig and zag every year. Cuts in compensation are "more widespread now than in past recessions," said John Challenger, chief executive of outplacement firm Challenger, Gray & Christmas Inc., which tracks employment trends. Last week, Challenger reported that more than half of human-resource executives surveyed in May said their companies had instituted salary cuts or freezes in an effort to cut costs. That was up from 27% in the same survey in January. The Bureau of Labor Statistics' employment report Friday showed that average hourly pay for production workers rose only 0.1% in May for the second month in a row. Yearly growth has slowed to 3.1% -- the weakest since 2005. With unemployment heading toward double digits by year's end, it appears many workers will have few choices -- or bargaining power -- but to continue to accept the lower salaries. David Levy of the Levy Economic Forecasting Center said the distress in finance, autos, retailing and other industries is exerting downward pressure on compensation. He expects unemployment to rise to double digits, and "pay rates may eventually cease rising altogether," he said. Besides large companies announcing pay cuts, state and local governments also are trimming wages or forcing workers to take unpaid furloughs. Federal Reserve officials are keeping a close eye on developments in wages. Continued downward pressure on wages could lead to further declines in inflation, which in turn would give Fed officials an incentive to keep interest rates low for a longer period of time. But there is a division within the Fed on whether slack in the labor market will translate into downward inflation pressure. Some inflation hawks believe the Fed has pumped so much money into the financial system that inflation pressures could build, even with high jobless rates. Nominal wage growth didn't turn negative in the 1973-75 or 1981-82 recessions. But both severe downturns occurred during times of high inflation. As a result, companies were able to cut their real labor costs by awarding raises that were lower than the prevailing inflation rate. In 1981, for instance, nominal pay rose 7.2%, but inflation soared 10.3%. Pay cuts are likely to spread further until unemployment stops rising and workers' position strengthens. The jobless peak isn't expected until 2010, meaning layoffs will be the norm for at least another year. Some employees are fighting pay reductions. Members of the Boston Newspaper Guild at the Boston Globe voted Monday to reject $10 million in concessions. New York Times Co., which owns the Globe, had said it would try to impose deeper cuts or close the Boston paper if the union didn't accept the deal on the table. (Please see related article.) Many companies oppose pay cuts as much as the rank-and-file do. Pay cuts are often demoralizing, and low morale can cut into productivity, which is a backdoor way of raising costs. "
Rather sad commentary on human-human interactions- instead of lifting people up, the discussion is about cutting people off.