“It’s a real kick in the shins,” Vagedes said.
Vagedes said he was able to get a delay in paying his mortgage, but all other bills and expenses have remained the same. “Doing everything on 20 percent less — it’s challenging,” he said.
The longer the shutdowns continue and the economy lags, the more likely temporary cuts are to turn permanent, or to result in further layoffs, economists warn. If companies resorted to reducing pay as a matter of survival, “then the next thing is, I just gotta cut [jobs] — I have no choice,” Zandi said.
Unlike job losses, which have disproportionately affected low-income workers, the pay cuts are mostly hitting workers in white-collar industries, according to the study of ADP data. Three-fourths of the cuts in pay fall within the top 40 percent of wage earners, researchers said.
And some of the biggest companies have taken part. Julia Coronado, a former Fed economist who founded the firm Macropolicy Perspectives, tracked U.S.-based companies with market caps greater than $1 billion and found that 42 percent of the 260 firms providing details on earnings calls between April and July were reducing pay.
Lyft announced three-month pay reductions for all salaried employees ranging from 10 to 30 percent, while retail giants Best Buy and Gap focused income reductions on executives.
The move to cut wages reflects that employers initially felt the economic downturn was going to be short-term.
At the beginning, as shutdowns first took hold, “There is a willingness to take a pay cut because you think it’s going to be a temporary thing,” said Diane Swonk, chief economist at Grant Thornton. “It really underscores how unique this recession is — people saw it as a transitory event.”
But the latest data now suggests the recession is likely to deepen and last far longer than initially anticipated as coronavirus cases reach record highs and a majority of the country has either paused or reversed reopening plans.
Growth in consumer service spending is expected to halt in July and August, Goldman Sachs said in an analysis on Friday. New unemployment claims have remained above 1 million, a previously unprecedented level, for 17 straight weeks. And the number of American households expecting to lose income over the next month has begun to rise in recent surveys after six straight weeks of declines, according to Census data.
“Now what we’re concerned about is that some of those temporary wage cuts could become permanent or turn into larger layoffs down the road,” Swonk said.
It’s too early in the crisis to know for sure whether the pay cuts are here to stay, economists say, though it’s difficult to expect wages to rise while so much of the economy remains shuttered and while consumers are too concerned about the coronavirus to resume regular behavior and spending.
Some of the biggest cuts are almost certainly going to be short-term, like companies that slashed executive salaries down to zero, Coronado said. But other reductions could persist.
“We have seen the share of companies reporting more permanent layoffs rising,” she said, “so if that is on the rise, then you might get some of these pay cuts proving to be more lasting.”
