The Wages of Recession: Average 2010 Raises Will Barely Cover Inflation

Salaried employees hoping their 2010 annual raise will provide some relief as they attempt to recover from the worst economic downturn in 80 years are likely to be disappointed: Raises for U.S. workers may barely keep pace with inflation this year.New projections from The Conference Board show that the average company will budget just 2.8% of its salary pool for wage increases, barely exceeding inflation -- the first time in more than two decades that number has fallen below 3%. Furthermore, the business research organization says employers are adjusting their pay scales for all employees downward -- in fact, the 2010 salary structure adjustment for all categories of employees is projected to be 2% or less, far lower than the Conference Board's projected inflation rate of 2.6%.

After months of news about over-sized bonuses being paid to Wall Street employees whose companies were on the verge of bankruptcy last year, word that salaries across the board are in danger of being permanently adjusted lower will come as a heavy blow to the millions of U.S. employees who have been working longer hours to cover for laid-off colleagues.

Companies generally plan salary increases in their budgets to reward great performance during a particular year, allowing wage growth to exceed inflation and moving people into higher salary ranges. Lower budgets for salary increases suggest employers are eliminating higher paying positions or planning to pay less for the same level of work.

"Salary ranges also represent employers' anticipation of what the job market will require," says John Gibbons, program director for human capital at The Conference Board. "Projections of near zero percent in real terms mean that employers are making the assumption that the salary market is simply not going to move up, regardless of increases in the cost of living."

Bad As It Sounds, It's Better Than 2009

According to the U.S. Bureau of Labor Statistics, total compensation grew by 1.5% while consumer prices rose by 2.7% during the 12 months leading up to December 2009. That means, adjusted for inflation, total compensation fell by 1.3%. By default, the average U.S. worker took a salary cut last year, whether he got a raise or not.

As the rising cost of living continues to squeeze consumers, stagnating wages add another obstacle to the already struggling recovery in progress. Even though there have been five straight months of improving economic numbers that suggest job growth could be on the horizon, Gad Levanon, The Conference Board's associate director of macroeconomic research, says a recovery in compensation is probably a few years away.

"In the previous three recessions, compensation began accelerating only several years after employment bottomed. High levels of unemployment allow businesses to limit raise demands from existing workers and hire workers from unemployment at lower compensation levels," Levanon says.

That means that not only have jobs disappeared during this recession, but wages are fading as well.
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