- Salary cuts — last seen during the global financial crisis in 2008 — are back as companies try to cut costs as the coronavirus pandemic drives an economic slowdown.
- While the move keeps workers employed and could help companies survive the downturn, it could also damage consumer confidence and make a recovery take longer, economists say.
- “The impact down the line is that there’s going to be less spending,” Bank of America economist Joseph Song told Business Insider. “That’s where you could see a shortfall, and that could lead to a weaker recovery.”
- Visit Business Insider’s homepage for more stories.
Companies are resorting to salary cuts for employees to lower costs as the coronavirus pandemic drives a sudden economic slowdown. While it may seem like a prudent short-term move, it could weigh on the economic recovery further down the road, economists say.
Sweeping cuts to salaried worker pay was last seen more than a decade ago during the global financial crisis that started in 2008. The idea is that instead of laying all workers off, companies can save on labor costs but keep things rolling by slashing pay, shortening hours, or furloughing workers.
The practice has reemerged as coronavirus has spread. The outbreak has all but halted the US economy with most of the country now following strict social-distancing guidelines, keeping consumers at home and banning all non-essential business.
A handful of notable economists say the US — if not the entire world — is already in a recession. And if it isn’t already, others say it’s headed for one soon. For evidence of that, look no further than drastic cuts to gross domestic product forecasts and historically high unemployment claims.
A wide range of industries have been impacted. Media companies, fast-food chains, aviation companies, tech firms, and law firms have laid off employees, furloughed workers, or slashed pay to stay afloat amid the coronavirus pandemic.
“Revenues are plummeting in ways never predicted,” beyond worst-case scenarios, ZipRecruiter labor economist Julia Pollak told Business Insider. “It looks like [companies] are using all of the tools at their disposal.”
The pace of economic recovery is a crucial variable
As the coronavirus outbreak persists and the US takes measures to slow its spread, arguments can be made in favor of salary cuts. On one hand, they keep employees working and receiving benefits in most cases, even if they are making less money. The hope is that when the economy reopens, companies can reverse salary cuts quickly and everything will go back to normal.
On the flip side, economists are uncertain about what a US economic recovery will look like. While some are hoping for a swift rebound, or “V-shaped” recovery, many argue that it might take much longer for people to feel comfortable spending again, leading to a “U-shape.”
If the latter scenario unfolds, experts expect the negative effects of these salary cuts to linger.
“The impact down the line is that there’s going to be less spending,” Bank of America economist Joseph Song told Business Insider. “That’s where you could see a shortfall, and that could lead to a weaker recovery.”
A consumer-spending slowdown could hamper a recovery
Consumer spending has been a cornerstone of the US economy, especially in the later years of the longest-ever expansion that unfolded after the global financial crisis in 2008. It makes up roughly 70% of US gross domestic product. If it doesn’t rebound strongly, that would slow any economic recovery.
Data is already starting to show rapidly diminishing consumer confidence as the coronavirus pandemic has spread. The Bloomberg consumer confidence index posted its worst two-week drop ever at the end of March, spurred by a record 10 million Americans filing for unemployment insurance in the second half of the month.
Meanwhile, a preliminary reading from the University of Michigan Surveys of Consumers on Thursday showed that consumer sentiment plummeted the most on record in early April due to the coronavirus pandemic.
“Anticipating a quick and sustained economic expansion is likely to be a failed expectation, resulting in a renewed and deeper slump in confidence,” wrote Survey of Consumers chief economist Richard Curtin.
Even when the economy reopens, “there’s still going to be scars from this outbreak,” said Song. People are going to be reluctant to co-mingle in the economy, he said.
Government stimulus efforts will help — but they might not be enough
In the short term, workers will get some help from tax rebates and direct checks to households through the $2 trillion coronavirus aid package signed by President Donald Trump at the end of March. But if salaries aren’t returned to normal in the third quarter, “you could see a hit to demand,” said Song.
There’s also the uncertainty of salaries being reinstated to their pre-coronavirus amounts. While many companies have said pay cuts are temporary, there is no guarantee that things will quickly return to normal, especially if the outbreak of COVID-19 isn’t contained. If revenues don’t return, it’s possible that salaries won’t be so quickly raised either.
“It’s a very tricky situation where the declines in demand are going to be much larger than in any kind of recession due to layoffs or pay cuts,” said Pollak.
Those with retirement accounts or other dynamic investments have also taken a hit. Markets have been roiled by the coronavirus crisis, sending major US indexes down as much as 35% from records reached in February. While stocks have retraced some of those losses, they’re still far off from recent highs and are subject to more volatility going forward.
For those living on a fixed income, the market performance may weigh on their willingness to spend. That means a recovery “might take longer to materialize,” Pollak of ZipRecruiter said.
Still, it’s possible that a V-shaped recovery will take place, as some economists predict. Once the economy reopens, there is likely to be a spike in demand for personal services such as haircuts. Consumers may also be excited to get back to restaurants, movie theaters, and other forms of entertainment.
If consumers are ready to spend, “we really could see that surge back,” Pollak said.
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