05-18-09

Iowa State economists assess recession's impact on wages, immigrant workers

AMES, Iowa -- The country's serious economic downturn may not have hit rock bottom yet and two Iowa State University economists have been studying what that's actually meant to workers.

Peter Orazem

University Professor of Economics Peter Orazem says in tough economic times, firms don't typically cut wages. Instead, they hold back on employee increases and let inflation cut pay.

"Very low inflation is making that strategy more difficult this time around," said Orazem, who studies labor economics.

During the Great Depression, firms cut pay, but prices fell even faster and so wages rose in real (purchasing power) terms -- exacerbating the depression -- according to Orazem.

"In the first four years of the Great Depression, nominal wages (wages measured in terms of money paid) fell 20 percent on average, but consumer prices fell 24 percent," he said. "And so real wages (wages correcting for inflation) actually rose about 10 percent, and real wages continued to rise between 1929 and 1945."

Orazem reports that real wages have risen 4.3 percent in the last year nationwide -- increasing in every industry except mining, logging and manufacturing. Meanwhile, nominal wages have fallen in retail trade, but real wages actually rose 0.7 percent. He says average weekly earnings have only increased 2.6 percent because of falling average weekly hours.

"From this, you can tell that only a minority of workers have experienced wage cuts," Orazem said. "It is much more common for firms to reduce hours and to lay off workers. That way, they can decide who they retain."

One group that's taken a major hit in management decisions is the immigrant, low-wage workforce -- such as restaurant or agricultural workers. Dave Swenson, an associate scientist in economics at Iowa State, says the recession has hit that portion of the workforce on many fronts.

"First, we know that the flow of people out of Mexico, primarily, into the U.S. slowed considerably last year on into this one," said Swenson, who also serves as a staff economist in ISU's Regional Capacity Analysis Program (ReCAP) where he has studied Iowa's foreign-born population. "We also know that there have been sharp reductions in the estimated amount of remittances to Mexico."

Swenson reports that as consumer spending continues to sag, so too do demands for a very wide range of business services performed by immigrant workers.

"Motel/hotel occupancies are down, dining out is down, importantly -- stimulus intentions notwithstanding -- construction is down across the board, and custodial and business maintenance services are down," he said. "All of these categories have a disproportionate share of foreign-born workers.

"On the plus side, if there is one, the nation's meat processing sector has been relatively stable -- people still eat -- so foreign-born workers are able to continue to work in that sector," Swenson said.

According to Orazem, Iowa's overall employment numbers have been surprisingly good during the downturn, although he projects them to be worse in April than in March when new data becomes available by the end of the week.

"Continued weakness in manufacturing and business services will be dragging down the overall numbers," said Orazem. "Construction should start seeing a turnaround in May, but I do not think we will have already started seeing construction jobs coming back as early as April."

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