Pay-Cut Cities

Forbes

It's not the best time to make a new start of it in New York state. Although the state's unemployment rate is better than much of the country's, a recent study shows that average wages are falling more rapidly in New York cities than metropolitan areas elsewhere in the country.

Six of the 10 cities where wages have fallen the fastest this year are in New York, according to a study from the Brookings Institution, released last week. From the fourth quarter of 2008 to the first quarter of 2009, average wages fell in Rochester, Syracuse, Albany, New York, Poughkeepsie and Buffalo--and the decline is wreaking havoc on the state's finances.

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Everyone knows there are job losses in a recession, but curiously, it is unusual--even in the depths of recession--for wages to fall. Wages are considered "sticky": Employers generally prefer to cut jobs than to cut the salaries of their staffs. When employers ax more higher-paid jobs than lower-paid ones, average wages fall.

Wage changes vary widely from region to region, as highlighted by the Brookings Institution's MetroMonitor report, which parses economic data on the country's 100 largest metropolitan areas. The report compares the change in real average wages for the 100 regions from Q4 2008 to the Q1 2009.

Recessions always have different effects from one region to the next. The bursting of the housing bubble hit hardest in Florida, California, Arizona and Nevada, but left much of Texas unharmed. Unemployment has climbed in housing-bubble cities and manufacturing centers, but has remained relatively low in the agriculturally centered Midwest.

The data from Brookings shows wage declines in 2009 have been particularly severe in the state of New York, while wages are starting to rise in many of the cities that suffered the worst of the housing bust.

"Employers are generally reluctant to cut nominal wages," says Howard Wial, a fellow at Brookings' Metropolitan Policy Program, so regions seeing a fall in average wages are likely experiencing something other than across-the-board wage cuts. "Higher-wage people are likely being laid off to a greater degree than lower-wage people, or moderately high-wage workers are being replaced by temps or contractors who are paid less," says Wial.

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That explains much of what's happening in New York and Chicago. Wages fell 1.5% in New York and 0.7% in Chicago in the first quarter of 2009 from the previous quarter. Many high-paid financial workers lost their jobs or suffered sharp drops in performance-based compensation. So even though New York's unemployment rate of 7.6% is significantly better than the national average of 9.4%, the loss of high-paid jobs means average wages fell sharply. Rather than everyone losing income, the economy's mix of workers is changing.

The picture is even worse in upstate New York, where average wages fell 2.3% in Rochester and 2.2% in Syracuse. Wial suspects that the plunge in New York City is big enough to skew wage data across an already weak state. Because of the way data are gathered for this indicator, "you're probably seeing the influence of the city throughout the state," says Wial. "I don't think there's any other state where one city would be quite as much of a factor statewide."

Falling wages have a devastating impact on the state's tax revenues, which draw heavily on high-earners. The New York State Comptroller's Office reported that, in May, personal income tax revenues plummeted 44% compared with a year earlier. In the Big Apple, the mayor's office estimates tax revenues for fiscal year 2010 will be 30% below those of 2008.

The New York governor's office did not return calls for comment, but it's clear the state is acutely aware of the problem. "The economy continues to be shaky, and state revenues continue to be below prior-year levels," said New York State Comptroller Thomas P. DiNapoli, in a statement accompanying the release of the state's plunging tax revenues. "The Division of the Budget projected that the first quarter of the fiscal year would be tight, so this is not a surprise. The General Fund is at historically low levels."

Although falling wages are always a sign of economic sickness, rising wages are not a surefire indication of economic health. Phoenix, Cape Coral-Fort Myers, Fla., and Fresno, Calif., where home value declines have been among the sharpest in the country, have logged a rise in average wages. Fresno's average wages rose even as unemployment spiked to 15.5% in the first quarter.

"The indication is there's a slowdown in migration to those places," explains Wial. "Workers are not perfect substitutes for one another and it may be that there is a decline in demand for lower-paid kinds of workers."

When higher-paid workers lose their jobs, it lowers average salaries. When lower-wage workers lose their jobs but people like bankruptcy lawyers and doctors all keep working, it raises average salaries. And the bottom falling out of a city's economy is not a healthy development.

But in some cities, rising wages do indicate relatively healthy economies. Average wages in Tulsa, Okla., rose 2.6% while unemployment registered a fairly benign 6%.

Wial says the data help to sharpen the picture on regional economies. "We're learning there are two sun belts and two manufacturing belts. The Sun Belt that is dependent on retirement and tourism has really suffered a lot--Florida, Nevada, much of California. The energy Sun Belt and government-military Sun Belt--Texas, Oklahoma--[has] done quite well and [is] at or near the top of our rankings."

The same trends are emerging with manufacturing, he says. "You might generally think a lot of manufacturing makes a region more vulnerable to recession, but it differs quite a bit from the auto industry to something else. The auto industry and auto suppliers--places that depend heavily on those industries have been hit very hard. But other types of manufacturing have done fairly well and sometimes quite well."

Cities Where Wages Fell the Most

No. 1: Rochester, N.Y.

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Wage Decrease: -2.3%

In April, when the national unemployment rate was 8.9%, unemployment in Rochester was a relatively low 7.4%.

But the economy of the region has suffered heavily, contracting 4.4% since its peak. Many jobs have been spared; many wages have not.

No. 2: Syracuse, N.Y.

Wage Decrease: -2.2%

Syracuse, too, has a better unemployment rate than the national average--only 7.7%--but its GDP has contracted more than 5% from its peak. Those economic losses have to show up somewhere.

No. 3: Albany-Schenectady-Troy, N.Y.

Wage Decrease: -2%

When wages fall across a state, tax revenues to the state capital plunge as well. The New York State Comptroller's Office reported that, in May, personal income tax revenues fell 44% compared with a year earlier.

No. 4: New York, N.Y. / Newark, N.J. / Edison, Pa.

Wage Decrease: -1.5%

Average wages can be disproportionately skewed by losses at the top. When a worker earning slightly above average loses his or her job, the overall average barely budges. but when financiers earning hundreds of thousands lose their jobs, it pulls down average wages quickly. Plunging salaries on Wall Street explain the fall in New York, and affect the rest of the metropolitan region as well.

No. 5: Poughkeepsie-Newburgh-Middletown, N.Y.

Wage Decrease: -1.5%

Up the Hudson River, the effects of Wall Street's troubles reverberate. Poughkeepsie has only 7.2% unemployment and its economy has shrunk only an estimated 2.8%, but wages are falling.

Click here for the full list of 10 metropolitan areas where wages fell the most.

Cities Where Wages Rose the Most

No. 1: Phoenix-Mesa-Scottsdale, Ariz.

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Wage Increase: 2.6%

After experiencing the worst of the housing bust--home prices have fallen more than 50% from their peak in Phoenix, according to the Case-Shiller home price index--at least wages are growing in the Phoenix area.

Is it a "green shoot" of economic growth, or just evidence that people are no longer moving to Phoenix, causing a tight labor market for high-end jobs?

No. 2: Tulsa, Okla.

Wage Increase: 2.6%

Tulsa's economy has stayed strong through the recession. Home prices have continued to rise, according to the Federal Housing Finance Agency, and unemployment is a low 6%.

No. 3: Baltimore-Towson, Md.

Wage Increase: 2.5%

Baltimore is increasingly an extension of the nation's capital. As lower-wage industries are replaced by relatively high-wage government-supported jobs, average wages increase.

No. 4: Cape Coral-Fort Myers, Fla.

Wage Increase: 2.3%

Unemployment in Cape Coral, a major housing-bubble city, is a painful 11.9%. But average wages are jumping. It's likely a sign that low-wage jobs created by the housing boom are being lost much more quickly than high-wage jobs. That pushes average wages higher, but it's not a positive sign for the economy.

No. 5: Tucson, Ariz.

Wage Increase: 2.2%

Tucson has managed to keep unemployment at 6.5%, two percentage points below the national average. A relatively tight job market means wages can still rise.

Click here for the full list of 10 metropolitan areas where wages rose the most.

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