Labor Market: Assumptions and Expectations

As we discussed in the last post, information plays a key role in being successful as an employer or employee in the labor market.  By understanding the major characteristics in the market, we can attempt to develop plans that maximize the benefits while minimizing the costs.  Although most of us would agree with that statement, our actions default to another point of view.  Unlike brain surgery or piloting of a plane where most would be very hesitant to act without sufficient information, we assume we know what the market is doing even when we do not have good information.  In other words, most of us feel confident in making assertions about the market even when we do not have sufficient information.

Figure 1: Average Salary and Wage Increases, 2006-2010 (BLS, 2011)

One might conclude this confidence comes from that fact that most of us have been in the labor market, taken jobs, hired others, and made decisions that impact employment and to a lesser extent the labor market in general.   A client for number of years summarized this propensity as “everyone thinks they are a compensation expert, especially about their own job.”    As a result, there are a fair number of exceptionally intelligent, hardworking people out there that operate on assumptions more than real information.  So, what are some of the bad assumptions that differ from reality? In order to illustrate this point, I will draw on common responses I have heard from employees and managers regarding compensation during the economic downturn.  There are three major assumptions that I hear the most:

• Raises Have been Flat for Years
• Everyone has It as Bad as We Do
• Public Jobs did not Suffer

Raises Have been Flat for Years

Although there are organizations that froze increases in 2008 or 2009, the national average for pay increases never reached zero.  Salary and wages bottomed out with an average between one and one and a half percent in 2009, but rebounded in 2010 (see Figure 1).  Average total compensation percentage increases dropped from above three percent in 2006 to right above one percent in 2009, but have rebounded in 2010 as well.  As cost of living slowed, unemployment and labor supply increased, and demand for labor decreased with economic activity, employers felt less compelled to provide increases similar to before the downturn.  The impact of “slamming on the breaks” is significant when you consider that employees had become accustomed to regular and sizable increases each year.  Moreover, when some employers stopped increases at all, it was the first time some employees experienced a “no increase” year.

Figure 2: Average Increase in Salary and Total Compensation by Region 2010 (BLS, 2011)

Everyone has it as Bad as We Do

Even through unscientific observation, it is easy to see that the downturn has manifested itself differently in different communities.  Out of a need for comfort or a desire to mentally justify the lack of significant increases, the assumption became that everyone had basically the same circumstances.  Figure 2 captures the average percentage increases in wages and salaries and total compensation for the United States as well as the major regions.  Obviously, increases in 2010 were not uniform for everyone.  The Northeast average wage and salary increases were above two percent while the South, Midwest, and West were between one and a half and two percent.    Figure 3 further illustrates the differentials by capturing the average 2010 salary or wage increase in major southern labor markets.  The Houston area did the best in 2010 with an average increase of approximately 3.4 percent.  Among southern markets, the real estate impacted area of Miami and Ft Lauderdale experienced the lowest average increase at 0.1 percent.

Public Jobs did not Suffer

The last common assumption is that public employment was not impacted by the economic downturn.  Although public employment has increased in some markets during the economic downturn, most of the media’s focus has been on wage parity (http://www.usatoday.com/news/nation/2010-03-04-federal-pay_N.htm).  Shifting public opinion toward government, greater political polarization, slower reduction in force, and concerns with budget deficits has led to private sector workers perceiving that public employees maintained pre-downturn pay levels and increases.    The private sector averaged 1.8 while the public sector increase was approximately 1.2 percent in 2010 according to the US Bureau of Labor Statistics. Consequently, the private did receive more on average than the public sector.

Figure 3: Average Increase in Salary and Total Compensation by Southern Market 2010 (BLS 2011)

Assumptions are dangerous in any type of decision-making.  As most of us prepare for 2011, it is important we have the most valid information possible.

• increases have slowed, but did not cease completely;
• differentials in increases exist across regions and local markets; and
• average increases have been greater in the private market.