The Role of Work Furlough in the Economic Recovery
Monday, July 06, 2009SUSIE GHARIB: Furlough. It's become a dirty word for millions of American workers these days. Unpaid time off is extending many summer vacations this year as businesses try to fight the recession. But it's also a less obvious way employers are cutting wages. As Darren Gersh reports, that could affect the eventual shape of the economic recovery.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Today was not a good time to renew a driver's license in Michigan or for that matter Maine or Connecticut. Budget pressures forced those states to furlough most of their workers. In all, 25 states have implemented furloughs or are considering them. And many private sector companies have also extended unpaid vacations. Judy Stoermer has seen it happen to colleagues.
JUDY STOERMER, OFFICE WORKER: Six months, four months, two weeks, it depends on the person. It depends on the job and what they need them to do.
GERSH: Labor economists like Kathryn Kobe consider a furlough one way to cut employee pay without cutting the employee.
KATHRYN KOBE, SR. ECONOMIST, ECONOMIC CONSULTING SERVICES: I think the furlough has always been around. It's just been known as the layoff of blue collar workers. When it's white collar workers, then it tends to be known as the furlough more directly.
GERSH: But because the government calculates wages on an hourly basis, a furloughed worker is unlikely to show up as receiving a wage cut, even though his or her annual compensation has clearly been trimmed. Kobe says that means the impact of furloughs on compensation is being under reported.
KOBE: I think it does not show up in many of the wage calculations that we have.
GERSH: And the calculations we do have are already dropping. Kobe compiles the BNA wage trend indicator which is signaling smaller wage hikes in the next six months, in fact, smaller than anything tracked by government compensation statistics in more than 30 years.
KOBE: I think it is possible it could go a ways below 2 percent. So I think we haven't seen that sort of slow down in wages in a long time.
GERSH: And there are signs employers intend to keep a lock on wages for some time. Watson Wyatt found one in five employers surveyed plan to keep salary reductions made in this recession. And one out of four employers who have forced workers to take furloughs either don't know if they will or don't plan to let workers eventually make up their lost pay. All this has economists like Dean Baker worrying about a downward spiral.
DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC & POLICY RESEARCH: So that means workers have less money in their pockets. They'll obviously be buying less. So that's going to reduce demand and therefore cause more firms to lay off workers or in some cases, even go out of business.
GERSH: The one saving grace in all this is that inflation has been tame in recent months, so real wages for most workers who do keep their jobs have been holding steady at least for now. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
