Reasons for the Current Higher Wages in the US

In the recent New Yorker column linked above, James Surowiecki cites some good reasons for why average American worker wages have actually risen during the recession:

  1. If employers cut wages, the more productive employees would leave for new jobs while less productive and less marketable employees would stay. Employers clearly don’t want this.

  2. Wage cuts reduce morale leading to reduced overall productivity, so employers are reluctant to cut wages.

Surowiecki uses the fact that productivity-per-employee has actually risen significantly as support for his conclusions.

However, he leaves out a reason that, to me, is the most obvious:

The people who actually decide on laying off workers typically get paid more than the workers that are being laid off. Thus, as lower-waged employees are cut, the higher-waged ones form a larger proportion of the employees that are still employed, thereby increasing the average pay-per-employee. By the way, I’m assuming that he’s including salaried employees in his analysis as well. If not, he would be excluding a significant subset of the “average worker”, which would certainly detract from his conclusions.

As someone who works for a company that has had significant headcount reductions, I see how this works mechanically. Headcount reduction, and not expense reduction, seems to the primary motivation of management. There are several rational reasons for this, which I don’t think are all that important for the purpose of this discussion. But in practice, its the lower-paid workers that do get cut first. There are more of them to cut and they are not missed as much on a per-capita basis.

Interestingly, the fact that productivity-per-employee is higher also supports my conclusion. Higher-waged employees ARE more productive. Also, laid-off employees are often replaced by technology. Both of these lead to higher productivity-per-employee.

I’d love to hear the thoughts of others on this subject.

I work at a still-profitable insurance company. To stay that way, we just had a layoff of 6% of the work force, as well as a wage and hiring freeze. (up until this financial crisis, this company was good with pay-raises and bonuses, even with the rank and file).

The layoffs were not targeted at lower wage workers. They justified layoffs by our recent efforts to streamline processes and take advantage of newer technology. They did it as a ‘who could we do without’ process. As a result, some heavyweights in the company (Senior VPs and Managers) were among those laid off. Including my boss. But every branch and department lost people.

I don’t mean to imply that lower wage workers are being targeted intentionally. It’s just result of who’s making these decisions. Plus, if an IT department cuts 30% of its workforce, it will still need to keep a CIO, a security head, a network head, etc. Even if they were to take pay cuts, the average salary of the department would still increase.