How Your Salary Could get Slashed to Boost Company Profits

With already deep and growing job losses it’s no real surprise that pay cuts are also becoming more common. According to the LA Times, an “index that measures growth in wages alone for private-sector workers inched up 1.4% … the smallest rise since the government began keeping statistics in 1975.” Similarly, in an all-time record low for the 63-year old Reuters/University of Michigan consumer confidence index, only one in ten consumers was able to say their household income grew in the past year.

There are inflationary and deflationary explanations for the salary cuts. The inflationary side expects the dollar to continue to weaken. It’s already been trending downward for about eight years. The sliding dollar helps make US salaries more consistent with other countries, but in the process it also erodes the purchasing power of American wages.

The deflationary version of salary cuts results from the increased joblessness we already see.  With fewer customers around companies have to drop prices in order to boost sales. Those price cuts hurt profits and force companies to cut costs… potentially in the form of widespread and severe pay cuts.

According to the article, “What’s troubling is the idea that many companies might have little or no incentive to raise pay or benefits in an economic recovery simply because labor worldwide remains in such a surplus. The nightmare scenario for workers would be a race to the bottom in the wages and benefits offered by employers, as the desperate jobless lower their pay expectations and in turn force those still working to accept less.”

In spite of the pain of salary cuts, investors focused on cost-cutting businesses could benefit. These companies are going to leverage the poor macro climate to lower their labor costs and pad profits even in the face of plummeting sales.

More details are available in coverage from The Los Angeles Times on the fear of pay cuts as the new normal.