Are Cuts in Hours and Pay an Alternative to Mass Layoffs?

December 6, 2008
Editorial Observer
Are Cuts in Hours and Pay an Alternative to Mass Layoffs?
By ADAM COHEN
I had five guests in my home recently. One announced that he had just been laid off. The woman next to him said she had, too. A third guest, who is self-employed, said she is not getting any new clients. I recounted this grim story to an old friend, who replied that her husband had just learned that his job was ending.
We are living in a time of mass layoffs: 12,000 jobs cut at AT&T; 53,000 at Citigroup. The Labor Department announced on Friday that 533,000 jobs were lost in November, the largest one-month decline in a generation. Many economists think things will be even bleaker in January, when holiday spending — such as it is — ends.
Government must be a big part of the solution, as President-elect Barack Obama has acknowledged by supporting a major stimulus package. But the deepening recession raises a question for businesses and workers — is it better to cut hours and salaries instead of jobs?
Mass layoffs produce big winners and losers. Most workers who remain are financially unscathed, even though their employer is struggling. Wages are actually expected to increase 3.5 percent in 2009. Those laid off are left with no salary and, because the job market is so brutal, risk losing their homes and being unable to put food on the table.
In times like these, many of the casualties are diligent, capable workers, not ones unable or unwilling to do a good job. They are victims of larger forces — like the failure of regulators to police the mortgage market, which helped set off the current downturn.
One way to reduce the need for layoffs would be to cut back on hours, spreading the available work among more employees. This was an idea that had considerable currency in the Great Depression. In 1933, the Senate passed a “30 Hour Bill” that would have barred from interstate commerce goods made by workers employed more than 30 hours a week. Its sponsor, Senator Hugo Black of Alabama, said the bill would create six million new jobs. It made no sense, he insisted, for some employees to work 70 hours a week “while others are driven into poverty and misery from unemployment.”
Black’s bill, which failed to pass the House, was too inflexible. But during the Depression, many businesses voluntarily cut hours to spread the work to help as many employees as possible survive the hard times. If companies decided to do this today, government could help by changing the rules for unemployment insurance. If an employer split a job between two people, say, rather than laying off one, both could be made eligible for partial unemployment benefits.
Businesses also could think about rolling back salaries. There already is a lot of automatic pay-cutting built into the economy. Richard Freeman, a Harvard economist, says that nearly half of private-sector workers in the United States have compensation that declines in tough times because of bonuses, stock options, commissions or tips.
For other workers, companies that are considering layoffs could instead reduce pay. In the case of unionized workers, the unions would have to agree. But as we are seeing with the United Automobile Workers union — which is offering to accept concessions as part of the Big Three auto companies’ plea for a federal bailout — many unions might prefer moderate pay cuts over job losses. For most nonunion workers, employers that want to avoid layoffs could act unilaterally to cut salaries.
There are clear drawbacks to cutting hours and salaries. If employers cannot prove that the cuts are actually necessary to save jobs, workers may feel they are being cheated and could retaliate by not doing their jobs well. The best workers, who may have options even in a tough economy, could decide to leave.
There also is the risk that if too many companies cut wages, it would feed deflation, weakening the economy further.
And for workers, there is the danger that the cuts in wages and hours that they agreed to as temporary, emergency measures could become permanent. When the economy picks up again, companies’ first priorities would have to be restoring wages and hours to their rightful levels.
So far, there hasn’t been a groundswell for cutting salaries. BusinessWeek reported that a survey in October found that 26 percent of employers were planning staff reductions in the next year, while just 4 percent planned on salary cuts. Gov. Jim Gibbons of Nevada recently proposed cutting salaries, including his own, rather than laying off state workers, and he was opposed by public employees’ unions.
But if job losses continue at their current rates — or accelerate — American workers may become more open to alternatives to the current approach of mass layoffs.