It Will Take Years for Your Paycheck to Recover From the Great Recession

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The long and severe recession is crushing wages, as the long-term unemployed settle on jobs that pay far less than their old gigs. A big decline in wages is a rare side effect of economic downturns since the Great Depression--the only other recession that featured large wages cuts was in 1981-82. "But the latest downturn is already eclipsing that one," the Wall Street Journal's Sundeep Reddy reports. And with joblessness hovering above 9 percent for 20 months, and likely to stick there for most of this year, wages could drop further.

From 2007 to 2009, the majority of people who'd had job for three years before they were fired took a pay cut when they found work again. And more than a third of them took at least a 20 percent cut. It will take years for their wages to bounce back to pre-recession levels.

The one upside to your long-term pain is that lower wages make American companies more competitive and able to hire more people. That could make the U.S. richer over time.

  • How Will the White House Deal with This?  "I think you will hear Democrats talk more and more about wage insurance--having government temporarily make up the shortfall between old and new jobs--especially with Gene Sperling back in the White House," Reuters' James Pethokoukis predicts. "He is a big proponent of the policy.  And we shouldn’t forget that John McCain proposed something like this back in 2008 during the campaign..." At the time, Pethokoukis notes that such a plan would be super expensive, and that even the more modest "wage insurance" proposals could make labor markets "less mobile and dynamic as there would be less incentive for workers to get back into the workforce or start a new business."
While compensation falls as the jobless have to settle into new, less-lucrative jobs, prices are also falling in other areas, especially in real estate. ... Buying power may not be declining as much as wages, although it’s certainly not increasing. ... The best way to resolve this problem is, not coincidentally, the best way to resolve the housing crisis and other economic woes: stimulate job-creating growth. Unfortunately, as the Obama administration pursues its regulatory expansion, it will disincentivize that kind of domestic investment, which will perpetuate this problem for at least another two years.
  • Unions Can't Help at This Point, Either  "At this point, I can't tell a plausible story in which labor reverses decades of erosion and roars back to a central role in American economic or political life," The Washington Post's Ezra Klein notes. "Maybe someone else can--and if so, I'd like to hear it--but I can't. The question is what replaces labor. At the workplace level, the answer is probably nothing."
  • This Is the Lingering Impact of the Recession, Bill McBride writes at Calculated Risk, even for people who can find jobs. He notes that "wages are typically sticky downward for those workers who do not lose their jobs--but for those who lose their jobs, wages can fall sharply when they eventually find new work (this happened in the early '80s too)."
  • It's Gonna Be Hard to Dig Out of This Hole, The Atlantic's Derek Thompson observes.
To give you a sense of how deep our employment hole is, consider one statistic: Even if we doubled the rate of December's job growth, we would still only achieve full employment by the mid-2020s. ... Despite months of positive economic data, this is still an economy where hundreds of thousands of workers are giving up looking for jobs every month. This has the effect of artificially reducing the unemployment rate because it hides more than a million working age Americans from the BLS's unemployment calculations. But make no mistake, most of those workers are coming back and their return will probably raise the unemployment rate before we see a steady fall.

This article is from the archive of our partner The Wire.