More workers hit with pay cuts than in last recession, and stagnant wages could linger

In the depths of the COVID-19 pandemic in early spring, with revenue plunging 70%, Dallas software company CEO Rishi Khanna quickly decided to cut the salaries of all 12 of his employees rather than lay some of them off.

Job cuts, he says, would have hurt employee morale at the firm, ISHIR. Plus, he adds, “we did not want to lose any of our key people.”

And with layoffs ravaging the economy, staffers were receptive to the pay cuts even though they still put in 40 hours or more a week.

“I knew many people that were already being furloughed or totally laid off,” says Bill Luisi, ISHIR’s senior director of sales, who took a 20% pay cut. “I felt grateful to have an opportunity.”

The layoffs and furloughs of more than 25 million U.S. workers have understandably fueled most of the nation’s anguish over the coronavirus recession. But that's not the only economic setback for workers: Many companies are trimming employees’ hours or wages to reduce costs – either instead of, or in addition to, the job cuts. For workers, a smaller paycheck may be a welcome alternative to losing a job, but economists say it still could hurt consumer spending and the economy, and represent an even more enduring legacy of the downturn than the layoffs. .

Nearly half of the nation’s net job losses in early spring have been recouped, though recovering the rest could take a few years, economists say.

Still, “you’ll see the employment level be restored more quickly than wage growth,” says economist Dante DeAntonio of Moody’s Analytics.  

Across the economy, most workers are not seeing their pay cut, but they are grappling with wage freezes or meager increases. From March through June, employers froze the wages of 58% of their workers, up from 36% during the same period last year, according to a recent study by the University of Chicago and payroll processor ADP. In the second quarter, the wages and salaries of private-sector workers edged up 0.4%, the smallest increase in five years, according to the Labor Department’s Employment Cost Index.

'Double whammy' for rehired workers 

Most affected by the reductions in hours or pay are furloughed employees returning to work, socking them with a one-two punch of financial distress. And while cuts in hours – which result in lower weekly paychecks, of course – are more prevalent, a historically large share of U.S. employers, like ISHIR, have taken the unusual step of reducing hourly wages or salaries during the downturn. 

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In April, the vast majority of unemployed Americans – 18 million -- said they were on temporary layoff or furlough, Labor Department figures show. About 40% of furloughed employees have returned to work, according to Gusto, a payroll and benefits provider to more than 100,000 small businesses. Of those, 29% have come back to fewer hours or lower wages, according to figures through August that Gusto provided exclusively to USA TODAY. That compares with just 17% of a much smaller pool of furloughed workers called back during the same period last year.

Many workers have been recalled by restaurants or shops, for example, that mostly or completely shut down in the early days of the crisis, and then reopened but without indoor dining or at lower capacity and limited hours. That curtailed workers’ schedules and pay.

“When they come back, it doesn’t mean they’re coming back to a rosy picture,” says Sarah Gustafson, Gusto’s lead data scientist. “They’re kind of getting a double whammy.”

San Diego-based Positive Adventures, which runs corporate team-building and outdoor youth education events, furloughed most of its nine full-time employees in March when sales vanished, CEO Melissa Lopez says. After she secured a forgivable federal loan, she brought back five of the workers and generated some revenue through summer camps and virtual events.

But in July, after she exhausted the federal money and with sales still down 80%, she scaled back their schedules to 20 to 30 hours a week.

When she did, “I was so nervous I would lose people,” Lopez says. She says she expects to restore their hours when business returns, though she’s unsure when that will happen.

Julie Fry, 36, the company’s sales and marketing director, has pared her two-meal-a-day takeout ritual to just one meal daily on weekends, and cut out frills such as going to hair and nail salons and buying clothes. Noting that her income is aided by freelance social media projects, she says she wants to stay with Positive Adventures over the long term because she believes in its mission.

“I just reset my expectations,” she says of her crimped schedule and wages. “We know there’s an end in sight.”

Among all workers, including those whoweren’t laid off or furloughed, 8.8% saw their hours reduced in August, up from 6% a year earlier, the Gusto data shows.

Pay cuts spread

While lower-paid hourly workers are more likely to see their schedules, rather than their hourly wages, trimmed, salaried employees are more likely to suffer outright pay cuts, Gusto’s data shows. That’s partly because it can be difficult to clip the hours of salaried employees who don’t punch a clock, says Daniel Sternberg, Gusto’s head of data science.

Nearly 7 million workers endured wage decreases from March through June, according to the study by the University of Chicago and ADP. Among employees who weren’t laid off during that period, 6.2% suffered wage cuts, up from 1.6% during the same period last year, the study says. During the Great Recession of 2007-09, 6% of workers took wage cuts but many firms may still slice pay this year, the report says, suggesting the eventual share could be far higher.

“Base wage cuts are a remarkable feature of the labor market in the Pandemic Recession,” the study says.

Traditionally, companies prefer to lay off some workers than reduce wages broadly, which typically hurts morale and prompts the best staffers to leave, say Sudarshan Sampath, research director for PayScale, a compensation data and software company that advises employers. Layoffs, by contrast, offer firms an opportunity to cut the worst performers, he says.

And while employee schedules can be expanded as business comes back, wages can be more difficult to restore because "there's not as clear a mechanism" other than employers keeping their word , Moody’s DeAntonio says. Pay cuts also can hurt morale by implying that workers are performing poorly, Gustafson says.

But this slump is different. The sudden and dramatic plunge in revenue as states shut down businesses in March forced many firms to do whatever they could to survive. And many companies believed the “pandemic’s impact on business performance would be short-lived,” Sampath says.

High-paid workers take it on chin

The highest-paid workers have been hit hardest by the pay reductions, with 13.4% of employees in the top 20% based on wages experiencing salary cuts between March and June, says the University of Chicago-ADP study. With layoffs prevalent, pay cuts at the top could represent “shared sacrifice across the organization,” Sternberg says.

Early in the crisis, myriad companies announced executive pay cuts, including Delta, Marriott, Bed Bath and Beyond, Nordstrom and Macy’s.

Khanna, the Dallas software CEO, says he couldn’t lay off ISHIR's poor performers because his boutique firm has none. And he couldn’t reduce employee hours because they’re focused on completing projects for other companies and often put in more than 40 hours a week.

He decided to cut the pay of top executives by 20%; midlevel managers by 15%; and lower-level employees by 10%. He says he wanted to minimize the pain for young workers already coping with relatively low salaries.

Luisi, the sales director, says his 20% cut has prompted him to defer the planned renovation of his kitchen and living room -- a $50,000 project – and the purchase of a new bike.

“I looked at this as an extraordinary time,” says Luisi, who has worked in the software business for more than four decades and earns a six-figure salary.

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Although many workers are taking wage reductions in stride, stagnant pay or meager increases could be tough for the economy to shake. Even after the nation recovered all the jobs lost in the Great Recession by early 2014, modest annual wage growth of about 2% persisted for more than another year.

“We’ve had a long period of low inflation,” DeAntonio says, a dynamic that limits the ability and need of businesses to boost pay.  “That’s not a driver of strong wage growth.”