Categorized | Career, Economy

Are You Ready For A Pay Cut?

I try to offer job search and career outlook advice through my blog.Typically I try to be upbeat. However, I’ve been thinking a lot about the job market from an economists perspective, recently.

With a lot of recent buzz about executive compensation because of the bailouts, the fact that this issue came to the forefront is not surprising. What does surprise me, though, is the fact that the major shareholders of said companies didn’t (and probably still don’t) understand the risk they forced on these executives. Trying to curtail these “incentives” does nothing to stop them from forcing future executives from taking equally ridiculous risks. The devil is in the details, right?

 paycut

Middle-Class Over-Compensated?

The above mentions how the uber-rich were chastised for accepting bonuses. But as I mentioned, the risks they took were a function of the rewards their shareholders demanded.

What happens when we take a look at the average worker in the United States. Surely, once you take out the million dollar bonuses, the average employee is rightly compensated…… right?

The Average US Worker – Overpaid

When you take a step down the hierarchy and instead look at the average worker, the picture doesn’t improve. American workers are vastly overcompensated compared to their global counterparts. If America wants to (and I think this is pretty logical) regain its competitive edge, there will have to be some sort of downward valuation on compensation and benefits packages.

One chilling snippit from the article:

Global wage convergence is great for the poor (MLR edit: China, Moldova, etc) but tough on the overpaid rich (MLR edit: USA, UK, etc). It’s possible to run the numbers to show that U.S. manufacturing workers should take average real wage cuts of as much as 20% to get into global balance.

The required cut may be smaller. But if U.S. wages get stuck above global market-clearing levels, as in the 1930s, the result could well be something approaching 1930s levels of unemployment.

“But MLR, wages (when adjusted for inflation) haven’t budged in nearly the past decade for middle-class workers, anyways!” This is true, and the focus of the disparity seems to be amongst the top-income earners. However, in a global context, no one cares about whether or not we are making more money than last year except for us.

Illusions of Grandeur

And discussing this topic without also mentioning the fact that the situation was exasperated by the illusion of a rising standard of living would be missing an opportunity to have a wholesome conversation. Why do I say illusion of an increasing standard of living? To some, they may look around their house and exclaim “How can you tell me that what I see and experience is fake, MLR? How is my house and car an illusion?” I say this because the standard of living increases depended on debt creation and sequential asset bubbles (stocks, real estate).

To put this more bluntly, and some would say cynically, there hasn’t been economic progress for some segments of the US population for literally decades.

How did we let this happen?

The US has made, and continues to make, massive investments of both manpower and capital into things that haven’t produced any real return. This could be compared to selling our economic soul to the devil in exchange for cheap trinkets.

And how did that happen?

This seems like a pretty big systemic problem at this point, right? The mechanics behind this prolonged misallocation of resources was fueled by the government overspending, government spending on useless projects, and consumer/business spending fueled by debt rather than real value creation.

What does this mean?

In the long-run? People need to move out of bubble professions (looking at all of the newly licensed real estate agents, here) and into real value and foreign exchange producing roles.

Preparing for Pay Cuts

In our lifetimes, it is increasingly likely that our nominal incomes could actually decrease.

The LA Times wrote a pretty good article, which states in closing:

A slow way to achieve that reduction would be to allow the dollar’s value to continue to slide against other currencies, a trend that has been underway since 2001.

The fast way — sudden and steep pay cuts across much of the economy — is a chilling concept. It would risk a deflationary spiral of falling incomes leading to falling prices for goods and services as workers have less to spend — exactly the spiral that the Federal Reserve is so intent on stopping before it can get any momentum.

If the pay cuts occur because of currency devaluation, you may not notice the differences as much – it’ll be more subtle if handled correctly. If some businesses decide to go the second route, we may have a dark road in front of us as we see salaries getting slashed.

With a high domestic unemployment rate and a high global unemployment rate willing to work for less, this isn’t out of the realm of possibility.

To prepare, focus on making yourself more competitive by making your resume more competitive, getting an in demand college degree, learning from other people who got hired quickly, honing your interview skills, and focusing on networking.

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MLR is passionate about saving for his future while maintaining a high quality of life. He currently resides in a great town, has a wonderful girlfriend, adopted the cutest puppy ever, and works for a Fortune 500 company.


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14 Comments For This Post

  1. Jeff Says:

    Interesting post. I agree that wages for the past decade have not changed much, yet everything else continues to rise. I lived in China for a year and saw how they were paid. The “tech” jobs recieved more pay because they required a college degree. The were paid quite similar to us, factoring in cost of living. Their cost of living was low so the low wages seemed to be on par with our high cost of living and “high” wage. People there was starting to buy their first cars, and other luxury items. It was kind of a time worp, they appear to be at the 1950/1960 “possession” level of the USA. I may be way off base on this, but it’s what I saw and learned while there.

    [Reply]

    MyLifeROI Reply:

    @Jeff,

    There are a multitude of reasons for the wages not rising in America. And interestingly enough, we are still overcompensated. Funny how that works out, eh?

    In your time in China, did you get to ask people personal questions about their finances? Just curious, because I wonder how truly alike their situation is to our 1950s/1960s. Whereas our standard of livings raised at illusory levels because of consumer credit and debt financing, I wonder if the Chinese are truly owning what they purchase. If their culture and normal behaviors stay consistent, I’m going to guess that they aren’t racking up the credit card bills.

    [Reply]

    Jeff Reply:

    @MyLifeROI, I lived in a rural part of China only 3.8 million people :-) Every person I spoke with (but one) did not have a credit card and EVERYTHING they owned was paid for. People used personal loans from family members to pay for their first apartment/house. All cars were paid for in cash. They had debit cards, but only the “rich” had a credit cards (so I heard). The only person who did have a credit card was a small business owner who did alot of overseas purchasing for his business. People used the ATM a ton, but only to get cash because not many places took debit/credit cards yet. The big citys do accept cards, but usually at places that Westerners frequent.
    .-= Jeff´s last blog ..Net Worth – December 2009 =-.

    [Reply]

    MoneyEnergy Reply:

    @Jeff, you’re right…. I’ve read the details on individuals who seek to illegally immigrate to the U.S. and from their communities they save up over $60,000 grand sometimes just for the opportunity. 60 grand!!! What North American can get that kind of money from his/her friends? (maybe some, but I don’t know them…)
    .-= MoneyEnergy´s last blog ..Biggest Foreign Buyers of U.S. Debt =-.

    [Reply]

  2. Craig Says:

    Hopefully pay cuts does not come. In some ways that’s worse than getting laid off because now you continue to do the same job but can’t afford the same lifestyle.
    .-= Craig´s last blog ..Weekly Personal Finance Twitter Chat: Scholarships =-.

    [Reply]

    MyLifeROI Reply:

    @Craig,

    Question (which I think I know the answer for): Would you rather get a 20% pay cut or lose the job to someone globally who is willing to work for 25% less?

    It may suck, but it also may be required for our country to stay competitive.

    As they say: “All good things must come to an end.”

    [Reply]

    Craig Reply:

    @MyLifeROI, Hopefully not a situation I have to have but I know your point. This question has been posed before in other ways. A company gives employees the choice of having lay offs or 20% pay cut (or whatever %). Thing is more people said lay offs. It’s just hard to motivate yourself to do the same thing when you know you are being underpaid, and affecting your lifestyle. Maybe a new job could weigh the same pay, of course there is a risk. No one answer, very tough scenario.
    .-= Craig´s last blog ..Weekly Personal Finance Twitter Chat: Scholarships =-.

    [Reply]

  3. David/Yourfinances101 Says:

    I took about a 28% paycut in 2009. I had a pretty good idea it was coming, but I still didn’t prepare in time. I cut back on spending, I was just a little too slow and too timid about it.

    I am fine, but I could have done better.

    Its usually a litle worse than you think. Or, if you take this mindset, it lessens the blow considerably.
    .-= David/Yourfinances101´s last blog ..The Naked Portfolio Manager: A Review =-.

    [Reply]

    MyLifeROI Reply:

    @David/Yourfinances101,

    What line of work are you in?

    I honestly think a lot of people need to start better preparing for pay cuts. Whether the employer outright cuts your pay or not is a moot point, it seems a lot of people are getting raises that are smaller than inflation. That is a pay cut, just not as obvious.

    I’m already prepared for my <3% end of year raise… or, a pay cut in other words!

    [Reply]

  4. MoneyEnergy Says:

    Nice to hear someone else talk about “bubble professions.” I totally agree – at least in Canada, you don’t even need a real estate agent – neither to buy nor to sell your home. It’s just been a big boom profession that really isn’t necessary (no offense to real estate agents – I know you’re talented and you could do many sorts of things). In my opinion (and this will be a contrarian point of view), even retail-level financial advisors (i.e., those with clients with less than, say, 500k in investment assets) are unnecessary. We need better financial education, not broker-pushers and pushers of dogmatic retail investment advice who make their fees off the uneducated. (Again, no offense to the people who act in this capacity themselves).
    .-= MoneyEnergy´s last blog ..Biggest Foreign Buyers of U.S. Debt =-.

    [Reply]

    MyLifeROI Reply:

    @MoneyEnergy,

    I can see how someone would be offended. But they shouldn’t be. They are simply reacting to what the market wants.

    But bubble professions are just that, and as long as the people who get involved have a good back up plan, they will be fine.

    [Reply]

  5. PS Says:

    You guys are stressing me out. I’m not looking for a pay cut and I’s sadly middleclass. Just paying attention to what the gov’t spends vs. our domestic products is scary and there isn’t much better times in sight

    [Reply]

  6. Ryan @ Planting Dollars Says:

    This sounds a bit like doom and gloom, but it’s all about perspective. I think there could be a silver lining as we’ve seen from the current recession. Pay is not everything and pay is not the key element in human happiness. If manufacturing workers are faced with a huge pay cut that may entice them to actually pursue something they enjoy since there isn’t as much of a pay difference.

    The current threat of competition will hopefully be a shot in the arm for Americans to get competitive themselves by becoming more efficient and worth their rate of pay versus their foreign counterparts.
    .-= Ryan @ Planting Dollars´s last blog ..Another Day in Paradise for $5.50 =-.

    [Reply]

    MyLifeROI Reply:

    @Ryan @ Planting Dollars,

    I wouldn’t call it doom and gloom at all. The numbers are very available and very real — US workers are over-compensated relatively speaking.

    For a job that does not need to be location specific, does being American justify a 20% premium over being Czech?

    The strange thing is that productivity in America is rising faster than pay, so our problem isn’t really productivity. It’s just pay.

    [Reply]

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I'm MLR. After graduating from college debt free, I decided to write a blog encouraging people to adapt responsible and sensible personal finance rules.


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