Unemployment Up - and Pay Raises too?

March 9, 2009

The February unemployment report from the Bureau of Labor Statistics (BLS) released Friday is bleak: a 8.1% unemployment rate.

David Leonhardt, writing in the New York Times Economix blog, tried to put a positive spin on the news by pointing out that the data imply average wages are rising, and are up about 3.6% over one year earlier.

How can this be? I suspect two things:

The BLS statistical measurement of average wages is likely accurate
The obvious conclusion, each worker got a raise averaging 3.6% in February, is very likely wrong

The phenomena is an old one known to compensation professionals: in times of layoffs, the average pay at companies losing workers often goes up, as reported in traditional compensation surveys.

Do You Know What You're Worth?

In this post, I will look at why average wages go up with layoffs, and what this really means. Want to know if wages for your job and skills are up or down? Find out with a free PayScale salary report.

It is All about the Mix

Economix reader L.I. hinted at the reason: the mix of workers changes with layoffs. Leonhardt reasonably appealed to another BLS measure, the employment cost index, that attempts to correct for the fact that lower wage workers are harder hit in a recession, thus changing the mix of workers in the average.

However, this "rising wages during layoffs" phenomena hits even surveys that have matched the workers and jobs year over year. Traditional compensation surveys are much more accurate than the BLS in categorizing jobs – though not as accurately as PayScale. If traditional comp. surveys can't avoid this problem, the less detailed BLS employment cost index will suffer from this error as well.

What is the cause? In every job, as typically defined, there is a range of workers, with a range of competence, and a range of pay they earn.

When layoffs come, companies tend to layoff the lower skilled, and lower paid, workers in each job.

Seniority Wins, Even If It Costs More

In unionized companies, seniority wins in layoffs often just because it is the union rule.

However, even non-union employers tend to keep the more senior, and expensive, workers in a given job. Why?

Simply put, when cutting staff, keeping the workers who really know what they are doing, even if they cost a few percent more, is smart business. There will not be any extra workers around to take up the slack after the layoffs.

At PayScale, we can drill down into the details of a job much further than traditional compensation surveys and the BLS.

Based on an analysis we did recently, pay for many jobs, specified with an accuracy only we can using our detailed survey of compensation factors and wages, is flat or down year over year.

Yes, a few jobs, like the hot medical jobs of physical therapist and pharmacist, are seeing raises of 4% or more, but most jobs are not. Some jobs, like mortgage loan processors, show substantial (-5%) median pay cuts.

So it goes: all aggregate statistics lie. The phenomena of increasing wages with layoffs is just one of those cases. In the case of the BLS average wage survey, "I do not think it means what you think it means." 🙂

In the current economy, it is important to know what you are worth. When you want powerful salary data and comparisons customized for your exact position, job offer, and degree, be sure to build a complete profile and get an accurate report by taking PayScale's Full Salary Survey.

Cheers,

Al Lee