Lots of Workers Are Still Getting Raises

Despite unemployment, productivity is protecting pay hikes

When a downturn hits, companies cut costs like a helium balloonist ditching ballast to avoid an ocean landing. In the 2001 recession, U.S. corporations slashed capital spending and cut millions of jobs. Curiously, though, one thing didn't suffer--pay raises. In the first quarter, wages and salaries after inflation rose at a strong annual rate of 2.8%. That's a bigger inflation-adjusted gain than in any calendar year of the 1990s.

One reason that pay gains remained strong during the recession was that unemployment remained low, averaging under 5% for all of 2001. But even though the economy is recovering, the jobless rate is still going up, hitting 6% in April. That's the highest level in eight years--and with corporate job cuts continuing, many economists believe it could go higher later this year. Auto-parts maker Delphi Corp. (DPH ), for instance, said last month it's laying off more than 6,000 workers. Telecom companies such as Qwest Communications International Inc. (Q ) and SBC Communications Inc. (SBC ) continue to slash thousands more.

Does this mean that most workers' good luck has run out? Probably not. There's good reason to believe that workers will continue to earn healthy pay raises for the rest of 2002, albeit not quite as strong as over the past year. That's because of continued strong growth in productivity, which measures how much each worker produces per hour. Although companies will no doubt hold onto a big share of those productivity gains to bolster profit margins, some will likely be passed on in pay raises to workers. And competition will force companies to share some of the savings with consumers in the form of lower prices, predicts James W. Paulsen, chief investment officer at Wells Capital Management in Minneapolis.

The bottom line: continued gains in inflation-adjusted pay. Macroeconomic Advisers LLC, a St. Louis-based economic consulting firm, predicts real wage gains of 1.6% for all of 2002. Says Chris Varvares, the firm's president: "We'd be very fortunate to have that, year after year after year."

Productivity is the key. The Labor Dept. reported on May 7 that U.S. workers' hourly output rose at a stunning annual rate of 8.6% in the first quarter. Because employees produced more while working fewer hours, the labor cost for companies to produce each unit of output plunged at a 5.4% annual rate.

How much real wages grow will depend on how the spoils of productivity get divided among companies, workers, and consumers. For now, much of the benefit seems to be going to companies. On May 8, U.S. stocks posted their biggest advance in months as Cisco Systems Inc. (CSCO ) posted a $729 million profit in its latest quarter, compared with a loss of $2.7 billion a year earlier.

In many industries, companies have more leverage over workers now than they did during the boom years. For the year that ended in March, inflation-adjusted pay rose just 2.1% in retail, for example, while white-collar workers in manufacturing got just a 1.9% increase. And the average Manpower temp makes $12.80 an hour, a nickel less than last fall. Manpower Inc. (MAN ) Chairman and CEO Jeffrey A. Joerres expects no change for the next six months.

In many tech companies, raises are well below historical standards. Oracle Corp. (ORCL ), for instance, says its average pay raise this year is in the low single digits. "The market is awash in talent," says Jeffrey O. Henley, Oracle's chief financial officer. "Nobody's giving out big raises right now because they don't have to."

Of course, some industries remain hard-pressed for help, and their workers are doing just fine. Nationwide, pay in hospitals rose 5.2% after inflation for the year ended in the first quarter of 2002. Tenet Healthcare Corp. says a nursing shortage is "putting pressure on nurse salaries" even though its overall labor costs are flat as a share of revenue. Pay also rose 3.6% in finance, insurance, and real estate--including a 7% rise at banks and savings-and-loans. And throughout the economy, says Steven E. Gross, head of compensation consulting at Mercer Human Resource Consulting, companies are jealously guarding their top performers and people with critical skills. Surprisingly, many are even looking for some new blood.

In a low-productivity economy, workers lose big in a recession and are slow to recover. But in today's high-productivity economy, those who kept their jobs fared well in the slump--and should do fine in the recovery as well.

By Peter Coy in New York, with bureau reports

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