Wage Cuts: The Pandemic’s Looming but Somewhat Hidden Disaster

Finance professor Dr. D.K. Malhotra answers FAQs about this underappreciated issue.

Somewhat lost in the attention-grabbing shuffle of a pandemic, starkly rising unemployment and the George Floyd protests is an economic shift that could have lasting negative consequences.

In addition to layoffs and furloughs, many employers have turned to employee wage cuts to help them weather the proverbial storm. The ripple effect of their impact on millions of workers and families, not to mention the job-market’s future, are causes for major concern in the eyes of many economists.

To help better understand what could be a looming disaster, we turned to Dr. D.K. Malhotra, the Nydick Family Term Chair and professor of finance at the University’s School of Business.

Businesses have to cut costs, but it will make economic recovery even more difficult. — Dr. D.K. Malhotra

Dr. Malhotra broke down what this trend could mean for American workers in the short- and long-term view, as well as offered tips for how best to prepare.

In addition to all the issues that have turned 2020 into a medical and economic whirlwind, concern is growing about how a return to “normal” will play out for those who’ve remained employed, but at a lower pay rate. How did this come to be?

As warnings about COVID-19 were unfolding in February 2020, it was “black swan” moment that no one saw coming. As country after country started shutting down their economies, the humanitarian and economic impact of COVID-19 started to unravel.

As public-health officials called for lockdowns of businesses, it started the unprecedented economic crisis with the shutting down of restaurants, shopping malls, airlines, hotels, theme parks, movie theaters, universities and other small, medium and large businesses.

Some businesses responded by laying off and furloughing workers. After several months of lockdown, businesses experienced significant decline in revenue, and they have started introducing pay cuts across the board.

Wage cuts or even wage freezes will also mean less disposal income for individuals and they will need to postpone any non-essential spending to make ends meet. — Dr. Malhotra

We barely came out of the financial crisis of 2008-2009, and we’re now back into it. The federal government already exhausted its policy options with tax cuts.

There’s talk of a second stimulus package. How did the first one help, and what are your thoughts on a second?

They provided a strong stimulus package by putting money in the hands of the people who needed the most and by increasing unemployment payments. It’s not sustainable in the long run because the budgetary deficit is already extremely high, and economic recovery that will bring in revenue for the government will take three to four years.

The second stimulus will be lower than the first one. If you get it, try to preserve it.

How will wage freezes play out in the immediate future?

On a short-term basis, it seems a reasonable response. Businesses have to cut costs, but it will make economic recovery even more difficult. If a consumer does not have the money, they will not demand goods and services, and it will come back and hurt business even more.

With decline in revenues and uncertain business environment, businesses are holding back on expansion. They have either scaled back or completely canceled their projects.

Your grocery expenses per month shouldn’t be more than 25 percent of your monthly after-tax income. — Dr. Malhotra

The drop-in business investment will lead to less job creation and wages will be forced down even further.

Wage cuts or even wage freezes will also mean less disposal income for individuals and they will need to postpone any non-essential spending to make ends meet.

Has there been any tangible impact of that so far?

Spending on fashion products is already down substantially, and companies are struggling to stay afloat. Neiman Marcus, J.Crew and Ascena Retail Group—the parent company of Ann Taylor and Lane Bryant—have filed for bankruptcy with plans to permanently close up to 1,600 stores.

What tips do you have for workers who find themselves in this precarious position?

Workers should save for the future and cut back on credit card debt if possible. Continue to work even if it’s reduced hours and wages. Don’t get tempted by unemployment payouts from the government.

Reevaluate your spending habits and see the difference between “I need this product” versus “I want this product.”

Keep yourself liquid. In economic downturns, survival depends on cash in hand. Buying a new car, because dealer is offering zero-percent interest, may not make sense because you will still need to part with cash every month. If you can continue with your old car, there’s no need for the new one. You don’t need any expensive jewelry or new clothes. You’re not going anywhere due to pandemic.

It will take us three to five years because this economic downturn is global in nature and will have a domino effect.– Dr. Malhotra

Try to reduce your utilities bill. I know it’s very hot right now, and we all need air conditioning, but try to set the temperature to 73 instead of 70 or 68. Pennies saved will make it a dollar.

Your grocery expenses per month shouldn’t be more than 25 percent of your monthly after-tax income. Try to use all your groceries. You will be surprised as to how much you save when you avoid waste.

When you face economic uncertainty, cash is the “mantra.”

What are your thoughts on the collective recovery prospects: Will it be a V-shaped or U-shaped recovery, or will it go toward L for a long period of time?

Even when recovery takes place, there’s uncertainty about the shape of the curve. Given what we’re seeing with the virus, I think the recovery will be more like a big U-shaped than V-shaped. We will see severe economic downturn now that enhanced unemployment benefits have run out.

Gold prices are now close to $2,000 per troy ounce, and it’s an indicator of market sentiment being extremely cautious and negative.

It will take us three to five years because this economic downturn is global in nature and will have a domino effect.

With several businesses closing for good and others not operating at full capacity, unemployment continues to rise.

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