Even if you’ve been spared from a layoff or furlough during the coronavirus pandemic, another financial risk could come from a different angle: a pay cut.
Nearly one-third of Americans are dealing with a lower paycheck in response to coronavirus-related cutbacks, a nationwide Bankrate poll from May found. That comes at a time when 342 firms on the Russell 3000 stock market index have slashed paychecks, the majority of which were extended beyond top-earning executives, according to a May 1 report from The Conference Board.
It’s unprecedented for its scale and speed, economists say, affecting virtually every industry and workers all along the ladder.
Firms were once reticent to reduce workers’ wages, but the coronavirus has put companies in all corners of the financial system in check — cutting costs to stay afloat and leaving even fewer Americans financially unscathed in the wake of the worst economic standstill since the Great Depression.
“We normally teach in economics that wages are sticky going down. If you lower wages, you might lose good workers,” says William Spriggs, chief economist at the American Federation of Labor and Congress of Industrial Organizations. “But when it’s a severe recession, firms tend to believe, ‘Where are you going to go?’ In the minds of workers, no one wants to jump into a job search. This is another one of those moments where people would rather take the pay cut.”
Hours cut or pay reduced? For some, it’s been both
Pay cuts don’t just happen at a salary level. Sometimes firms convert salaried workers into hourly ones and cap how much time in a week they can work. Others reduce workers’ top-line pay by a certain percentage, though the latter isn’t as common, according to Julia Pollak, labor economist at ZipRecruiter, an online employment marketplace.
“This is a rip-the-cord, break-the-glass kind of moment. All options are on the table,” Pollak says. “How high up the layoffs, the hours cut and the pay cuts are going — it really is totally unprecedented.”
The Labor Department’s monthly employment report for April showed broad-based losses in average hours worked each week, with the steepest declines in wholesale trade, construction and durable goods manufacturing. At the same time, the number of people working part time because they couldn’t find full-time work nearly doubled in April to 10.9 million individuals, accounting for about 7 percent of the U.S. labor force and the highest share on record.
With hiring at a standstill, firms aren’t as concerned that a valuable employee will walk out the door. Employers are also choosing to make up for profit shortfalls by reducing their fixed costs, instead of hiking prices for customers. More than 33 million Americans have filed for unemployment benefits since President Donald Trump’s emergency declaration on March 13. U.S. employers have cut more than 21 million jobs during the pandemic and unemployment is the highest since the Great Depression.
“The lesson of the Great Recession is still fresh in enough minds. People know, if you lose your job, you’re in big trouble,” Spriggs says. “Firms are trying to hoard cash, and workers are now becoming the piggy bank for some of them. They’re shaking the money out of their workers to try and find places to get the cash because it’s harder to shake it out of their customers.”
How to get by following a pay cut
The coronavirus crisis came at a catastrophic time. Nearly 1 in 4 Americans were worse off than before the Great Recession of 2007-2009, according to a June 2019 survey from Bankrate. Meanwhile, many Americans were still living paycheck-to-paycheck after wages never caught up. Nearly 4 in 10 Americans said in a separate Bankrate poll from January that they didn’t have sufficient savings to cover a $1,000 emergency expense.
1. Should you take a pay cut? Yes and no
If you’re offered the choice between leaving your current position or taking a pay cut, it’s going to require a balancing of scales. Is it better to take a hit on pay, knowing your paychecks might never fully recover? Or is it worth it, so you don’t have to deal with a potentially lengthy spell of joblessness?
“The history is quite clear that employers rarely reward your loyalty and get you back to normal pay when times return to normal,” Spriggs says. “A job loss from a shock like this, you just don’t make it up.”
General Motors announced in March that it would cut workers’ pay by 20 percent and pay it all back with interest by March 2021, but those circumstances might be an anomaly. At the same time, broader labor market forces will likely put downward pressure on wages. An elevated-for-longer unemployment rate will leave leverage on employers’ side of the court. Those entering the labor force will also likely have to take a lower-paying job, and a labor market with lots of workers on the sidelines won’t bode well for bumps in pay as a recruitment method.
Yet employers traditionally haven’t looked kindly on a jobseeker who’s been out of work for a while, Spriggs says. Even with catastrophic levels of unemployment, there’s a risk that might not change, meaning it could be risky to leave your position.
“You would think an employer would go, ‘That’s no big deal that you’re unemployed. Join the club. There are 23 million unemployed with you,’” Spriggs says. “American firms seem to have no capacity for doing that.”
But no individual situation is the same, says Lauren Anastasio, CFP at SoFi. Americans should also keep in mind the benefits they’re receiving beyond the paycheck, particularly health insurance, she says. If you don’t have a viable coverage alternative, it might not be wise to leave given the global pandemic.
“There is a lot more to consider than simply a paycheck,” she says. “It’s really going to be dependent upon what resources are available to you and truly where your other options are.”
2. See if you’re eligible for partial unemployment benefits
If you decide to take the pay cut, you may be eligible to apply for partial unemployment benefits. Each state has different eligibility requirements, but they’re generally available to those who’ve seen their hours significantly reduced. Be sure to check what your specific requirements are. A general rule of thumb for eligibility is if your gross weekly paycheck after a reduction totals less than what your state will offer in weekly benefit payouts.
Many states, however, have been inundated with applications for benefits, meaning it could be a rough road ahead to apply. Experts say applying is worth a shot if it could help your financial situation.
3. Tap into your savings (and if you can, still build it up after a pay cut)
Your financial response to taking a pay cut also depends on how much you have in your savings. Individuals who’ve been practicing the general 50-30-20 budgeting rule of thumb will likely be in a good spot, Anastasio says.
“You’re still able to pay your bills and stay at the same rate without feeling that financial crunch,” Anastasio says. “If we’re budgeting wisely, and we’re always putting away 20 percent of our pay, then you automatically have a cushion for if your pay decreases 20 percent.”
If you still have the financial wherewithal to save after a pay cut, it might be a good idea, she says. But don’t worry if you can’t put away exactly 20 percent.
“If it’s just impossible to move the needle on some of those other expenses, then saving may have to temporarily be decreased right now, and that’s OK,” she says.
4. Find ways to cut back on your spending and expenses
That being said, many individuals haven’t been able to stash that much cash away. If you decide to take a pay cut, it’s worth identifying ways to cut back. Pay attention particularly to your discretionary items, such as streaming services, gym memberships, meals away from home and shopping, Anastasio says.
You could also lift your income by temporarily limiting your retirement contributions, she says. Though most financial experts caution against doing so, it might be a wise choice if it means putting food on the table in the near term, she says. Of course, be sure to make sure you’ve exhausted all other avenues first.
“If that’s what you need to do to get by right now and avoid financial stress, anxiety or any other form of hardship, it’s not going to derail your long-term financial goals to decrease your savings for six months or a year,” Anastasio says.
5. Reach out to any financial firms you work with
Another way to trim expenses is reaching out to any lenders, companies and servicers you work with and taking advantage of the “goodwill” programs they offer during times of economic distress.
Some utility companies are offering payment forbearance. Others might be willing to lower your monthly payments if you negotiate. On the flipside, car insurance companies such as Allstate are giving policyholders refunds totaling $600 million over the next two months since stay-at-home orders translate to fewer accidents. It’s worth checking into what’s available for you.
“Negotiating with banks, lenders and service providers is always something I recommend, but now it’s so much easier,” Anastasio says. “These companies are so much better equipped right now to work with their customers to find something that’s comfortable and reasonable and collaborative in a way that works with everyone.”
6. Brush up on your skills to stay competitive
Pursuing new qualifications or learning a new technical skill can help give you a competitive edge when it comes time to negotiate for a raise, Pollak says.
Think about what skills you’ve always wanted to learn and what might help you do your job better, whether that’s getting some sort of certification or improving your use of computer programs. For example, one of the most highly searched for technical skills on ZipRecruiter is advanced Microsoft Excel knowledge, Pollak says.
“I would really recommend that jobseekers invest in their skills right now,” Pollak says. “This is really a time to understand that the job market is really competitive and be the best competitor you can.”
7. Don’t be afraid to walk away at some point during the recovery
And although it doesn’t seem like it right now, there’s going to come a time when the economy and the job market improves. Pay attention to your salary relative to the broader unemployment rate, your cost-of-living and other salary estimates in your field based on your educational levels and experience.
“People should be regularly evaluating whether they are earning what they’re worth, and that’s [how to know] whether they have to take a pay cut or not,” Anastasio says. “Whether someone is going to temporarily accept a pay cut or not, I do encourage everyone to think about checking in about every six months and doing your own mini analysis of the market.”
No matter what, it’s important to remember that this spell of economic distress is only temporary, Anastasio says. Optimism can help with your mindset when cutting back and dealing with anxiety.
“Think about it as a temporary sacrifice, as opposed to depriving yourself,” she says. “This does tend to make it a little bit easier as we evaluate our expenses and try to decide where to make some cuts.”
But whether that recovery comes sooner than later is the ultimate question. Forecasts from both private-sector economists and staff at the Federal Reserve estimate that unemployment will remain elevated for longer.
“For many people, the fear coming out of this is that we have only just begun to heal the wounds of the Great Recession, and here we are back again to this same drum beat,” Spriggs says. “There are so many things that are being exacerbated now. That suggests this will be a long recovery.”