For the Unemployed, New Job Often Means a Pay Cut

Unemployed for nearly a year, David Becker was relieved to land a new job in information technology last summer.

The offer carried a price, though: It was a lower-rung job than the one Becker had lost. He had to uproot his family from Wisconsin to Nevada. And, like many formerly jobless people who find work these days, Becker is now paid far less than before — $25,000 less.

It's one of the bleak realities of the economic recovery: Even as more employers are starting to hire, the new jobs typically pay less than the ones that were lost.

In the government's data, a job is a job. More jobs point to a growing economy. But to people who used to earn $60,000, a new $40,000 job means they'll spend less — and contribute less to the recovery.

"In most cases, it means a subdued expansion, for sure," said Marisa Di Natale, director at Moody's Economy.com.

Worse for those affected, people hired at lower wages in a tight job market tend to lag behind their peers for years, sometimes decades. For example, workers laid off during the 1981-82 recession earned 20 percent less than people who remained in a job — even 20 years after they were rehired, a Columbia University study found. The study examined pay for white- and blue-collar workers, managers and hourly workers.

That means a few short months of unemployment could haunt workers such as 34-year-old Jessica Moore for years.

Moore had been employed since graduating from Penn State University more than 12 years ago. But in March, she was laid off from her job as managing editor for digital media at the nonprofit Sesame Workshop in New York, which produces "Sesame Street."

In April, Moore got an interview for a job opening as editor and publisher of the nonprofit Teen Voices magazine in Boston. The job paid 25 percent less than her previous position. And the company was a fraction the size of Sesame Workshop.

Still, she leapt at the offer.

"I wanted the immediate security," she said.

It's hardly surprising that employers are being stingy with pay these days. Their own businesses were squeezed by the recession. Most depend on consumer spending, which remains tepid.

The first jobs to emerge from a recession typically aren't well-paying ones, says Till Marco von Wachter, a Columbia economics professor. Companies delay hiring for higher-paying jobs, in particular, until they're confident the recovery will last, he says.

In addition, as the unemployed compete for the few job openings available, employers face no pressure to raise wages. More than six people are now vying, on average, for each job opening, according to Labor Department data — compared with just 1.7 workers per opening when the recession began in December 2007.

That's why Becker considered himself lucky to get a job offer this summer as an information-technology manager after months of searching. That was even though he had to move his family from Milwaukee to Reno, Nev., and take less pay than he'd been used to.

"I think a very large number of people will never have the life they had at one time," he said.

Becker, 48, oversees fewer than a dozen employees, compared with the 60 he managed before the recession when he earned $25,000 more, or $150,000. He drained $100,000 in savings to support his family during a year of unemployment to pay his mortgage, health insurance and college tuition for two children.

Though his current job is a step down, he wasn't prepared to hold out for a better and higher-paying one. Too many other workers were lined up for each opening he sought.

John Irons, research and policy director for the Economic Policy Institute in Washington, says that as millions of unemployed workers accept lower pay for new jobs, their collective wage cuts will likely stifle income growth for years.

Inflation-adjusted hourly wages rose throughout most of 2008 but peaked at an average $8.65 in May for non-management hourly employees, as measured in 1982 dollars, according to Labor Department data. (Unadjusted for inflation, the average was $18.53.) Since then, inflation-adjusted wages have fallen 1.3 percent to an estimated $8.54.

The resulting wage depression is part of the economic "scarring" of the labor force, Irons said. For example, inflation-adjusted wages stagnated for four years after the downturn of 1991. And they remained mostly flat from 2002 to 2005, after the mild recession of 2001, according to Labor Department data.

"You can't spend what you don't have," said 35-year-old Travis Becker, who took a 12 percent pay cut when he was hired in July. Becker (no relation to David Becker) had been laid off a few months earlier by a Minnesota company that installed concrete pieces for commercial projects.

Pay cut or no, Becker is grateful to have a job at Wells Concrete in rural Albany, Minn. Becker moved his family from a small town near Minneapolis, lost his seniority and took a job with less responsibility.

"There's no other choice," he said. "It's job or no job."

Becker said he and his wife will remain as frugal as they have been after he was laid off. They dine out rarely and spend mainly on necessities for their three children.

Consumers already are saving more and spending less than they normally do, because of high debt and tight credit. With Becker and other newly hired workers keeping tight grips on their wallets, consumer spending could stay weak well into the recovery, sapping its strength. How much will hinge on how long and how deeply wage growth lags.

Pay tends to stagnate during or immediately after recessions — and it's often severe during "jobless recoveries," when hiring remains weak long after the economy starts growing again, according to a 2005 study by Princeton University economist Henry Farber.

For example, workers who lost jobs and found new ones from 1981 to 1983 took average pay cuts of 10.8 percent once they found new jobs, the study found. But from 1983 to 1985, as hiring accelerated, that pay cut narrowed to less than 8 percent.

But those who lost jobs and were rehired from 2001 to 2003 averaged bigger pay cuts of 13.6 percent as hiring stagnated for nearly two years during a jobless recovery.

By contrast, formerly unemployed people who were rehired during the boom years of the late 1990s averaged a minuscule pay cut of 0.2 percent, according to the study, which examined pay data from the Labor Department.

Moore, the former Internet editor for Sesame Workshop, said living in Boston turned out to be more enjoyable than her life in pricey New York.

But to make up the lost pay?

She said she's simply going to work harder in coming years to make some of it back.

"I do have to play catch up," she said.