Wage cuts steepest since the Depression?

The continued high rate of unemployment has made labor a buyer’s market, and the effect on price has been predictable — and substantial. The Wall Street Journal reports that wages have fallen farther than at any time since the 1981-82 recession, and that this downturn has already exceeded that crisis. As the unemployed scale back expectations on both jobs and income levels, compensation has retreated farther than any time since the Great Depression:

The only other downturn since the Depression to see similarly large wage cuts was the 1981-82 recession. But the latest downturn is already eclipsing that one. Unemployment has stood above 9% for 20 straight months—longer than the early 1980s stretch—and is likely to remain above that level for most of 2011, putting downward pressure on wages.

Many laid-off workers who have found new jobs are taking pay cuts or settling for part-time work when they get new ones, sometimes taking jobs far below their skill levels.

Economists had wondered how far this dynamic would go in this recession, and now the numbers are starting to show it: Between 2007 and 2009, more than half the full-time workers who lost jobs that they had held for at least three years and then found new full-time work by early last year reported wage declines, according to the Labor Department. Thirty-six percent reported the new job paid at least 20% less than the one they lost.

The severity of the latest downturn makes it likely that many of the unemployed who get rehired will take wage cuts, and that it will be years, if ever, before many of their wages return to pre-recession levels, says Columbia University labor economist Till von Wachter. “The deeper the recession, the lower the wage you’re going to get in the next job and the lower the quality of your next job,” he says.

In one sense, this is just the normal response to supply and demand. Labor is a commodity in that sense, and the cost of labor increases when supply is short, and decreases when supply is glutted. As a hiring manager for several years in the Twin Cities, we had to repeatedly increases wages across the board (not just for new hires) to keep staff on board and to entice qualified applicants to work for us when unemployment in the area was in the 3% range. Right now it’s more like 7% in this region, and I’m certain that had I remained in that career, I would be finding it much easier to keep the call center staffed without having to raise compensation levels at all.

It may not be quite as bad as it sounds, either. While compensation falls as the jobless have to settle into new, less-lucrative jobs, prices are also falling in other areas, especially in real estate. Retail prices have stabilized, but retailers are still relying on heavy discounting to move inventory. Buying power may not be declining as much as wages, although it’s certainly not increasing.

The reason that the problem is worse than at any time since the Depression, assuming that the WSJ is correct in that analysis, is that we have had the worst extended unemployment since that time. The best way to resolve this problem is, not coincidentally, the best way to resolve the housing crisis and other economic woes: stimulate job-creating growth. Unfortunately, as the Obama administration pursues its regulatory expansion, it will disincentivize that kind of domestic investment, which will perpetuate this problem for at least another two years.

Update: As the first commenter rightly notes, food and energy prices have risen (they’re linked, too), so that does accelerate the erosion of buying power.