It’s a downward spiral…..we earn less, so we have to borrow more to keep up the lifestyle we believe we must have and are entitled to. But credit is now shot as peak oil will ensure that we wont return to economic growth as we’ve known it; we wont be able to rely on growth to enable us to pay back the interest. Simply, this means the consumer economy is over. It formerly accounted for 2/3rds of our GDP. What will we replace it with?
Median weekly wages, when adjusted for inflation, fell slightly for both high school and college graduates from 2000 to 2009, according to a recent analysis by the Economic Policy Institute, a Washington think tank.
“The story is often told that college graduates have done well and everyone else has not. But that’s not true,” said Josh Bivens, an economist at EPI.
For high school graduates, median inflation-adjusted wages were $626 per week in 2009, compared with $629 in 2000, according to EPI. If you assume a worker gets paid for a full year, that adds up to $32,552 in 2009, down from $32,708 in 2000.
For college graduates, weekly wages were $1,025 in 2009, compared with $1,030 in 2000, according to EPI. Over one year, that works out to $53,300 last year, down from $53,560 in 2000.
But the recent recession isn’t to blame for the “prolonged period of wage stagnation,” according to EPI.
“Between 2002 and December of 2007, the country was in a period of economic expansion and for most of that time, from 2003 through 2007, wages fell,” the study said. “Wages had improved in the early part of the decade on the momentum of the rapid wage growth of the 1990s, but that progress was halted by the spike in unemployment during the 2001 recession, and never reestablished itself.”
Going forward, there could years of bad wage growth and possibly declines as the unemployment rate remains high, Bivens said.
“Even with low inflation over the past year we have seen wages lagging,” Bivens said. “The recession is so deep and widespread that even those close to the top of [the income scale] will do much worse than they have been accustomed to doing. The pain will not be spread evenly, but it will be the very fortunate worker who does not see slower wage growth.”
Separate research from Hay Group, a global management consulting firm, found that planned salary increases for 2011 are at 3% for clerical, supervisory, middle management and executive positions. That 3% gain is below the 4.5% to 5% increases seen at the beginning of the decade, and the steady 4% from 2005 to 2008, according to Hay.
“The past three years have seen the lowest base salary increases that most employees have ever experienced,” the study said.
The recession continues to cause businesses to be restrained when it comes to salaries, said Tom McMullen, Hay’s North American reward practice leader, in a statement.
“HR executives are looking for ways to balance the cost of reward programs and limited pay increases with the need to attract, retain and engage key talent,” he said. “Many organizations are emphasizing ‘total’ reward programs as a result — engaging employees in non-monetary ways through more meaningful work experiences, clearer career paths, global mobility and targeted development opportunities.”
Hay’s forecast is based on data provided from March through June by more than 300 small to large U.S. companies.
What’s A Family To Do?
The high unemployment rate is limiting many workers’ bargaining power. How to deal with stagnating, or even falling, incomes?
If you’re not doing so already, start living within your means, said Eric Tyson, author of “Personal Finance for Dummies.”
“The silver lining [of the recession] is that it forces consumers to cut out the fat and the unnecessary spending that doesn’t provide much value,” Tyson said.
Different people have different vices. Some eat out too much, while others smoke or buy pricey drinks at bars. Some have stretched their wallet too much for a house or went overboard remodeling.
And some spend on their kids.
“There’s a temptation to keep spending on your kids and rationalize it by saying you are helping them,” Tyson said. “We love our kids and we want what’s best for them, and we equate what’s best for them with buying them things.”
But kids need to learn that money doesn’t grow on trees and that their family needs to live within a budget, Tyson said. “The recession provides the perfect opportunity to show that mom and dad don’t have endless money,” he said. “You have to draw the line and not overindulge your kids.”
One important place not to cut is retirement saving, said Ric Edelman, author and financial adviser.
“My concern is that someone who gets a 10% pay cut may cancel their 401(k) — that would be disastrous,” Edelman said. “If you are putting away enough for retirement, it doesn’t matter how much you are spending as long as you are not creating additional debt.”
It can be tough to find excess spending to eliminate. But if a family’s income falls 10%, they need to cut expenses 10%, Edelman said.
“There will be some pain. You may have to cancel cable TV. Many families are spending $100 a month or more on cell phone contracts. It may mean eliminating an automobile, or eating out less often,” Edelman said. “Don’t cancel your insurance so that you can keep watching HBO.”
// Ruth Mantell is a MarketWatch reporter based in Washington