Why Did the Recession Cause a Big Drop in Wages?

If you look at the unemployment reports from the Bureau of Labor Statistics, then you see average employee earnings rising steadily since 2006, despite the deep recession. But that's because those numbers don't take into account the wages lost by Americans who experience unemployment and settle for a lower-paying job. By that measure, the recession has caused a huge drop in wages.

Sudeep Reddy reports for the Wall Street Journal:

Many laid-off workers who have found new jobs are taking pay cuts or settling for part-time work when they get new ones, sometimes taking jobs far below their skill levels.

Economists had wondered how far this dynamic would go in this recession, and now the numbers are starting to show it: Between 2007 and 2009, more than half the full-time workers who lost jobs that they had held for at least three years and then found new full-time work by early last year reported wage declines, according to the Labor Department. Thirty-six percent reported the new job paid at least 20% less than the one they lost.

It's hard to interpret this news as anything other than awful, but there are a few observations to make.

First, this isn't terribly surprising. For most of the industries hit hardest by the housing bubble's pop, good, high-paying jobs were lost. Since those jobs aren't coming back quickly, these people need to look to other industries. As a result, they will probably end up taking a job at a lower experience level than the position they they held before they were unemployed. This leads to precisely the problem noted above.

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Moreover, as long-term unemployment becomes more severe, people will become even more desperate. For those who see their unemployment benefits run out entirely, most will have to settle for a worse-paying job than they used to have. Some income is better than no income.

This might appear to provide a very, very thin silver lining. Even though these workers are making less money, having a job is better than remaining unemployed instead. But this point misses problem with this trend. If overeducated, overqualified workers are taking jobs below their old experience levels, then this will prolong unemployment for those jobless Americans who would have been more properly suited for those positions.

That's likely why we're also hearing that this recession is particularly hard on laid off workers with less education and relatively weaker experience levels. If wages are falling, this implies that lower-level jobs are being given to those who should be in higher-level positions.

Considering all that, it's easy to see why this recession has resulted in a bigger loss in wages than most others: the unemployment duration and rate is more severe than usual. As Americans become less picky about the jobs they are forced to take, their new salaries will be lower than their old salaries.