Bankrupting the Common People

For the Unemployed, New Job Often Means a Pay Cut

January 9, 2010

AP - Unemployed for nearly a year, David Becker was relieved to land a new job in information technology last summer. The offer carried a price, though: It was a lower-rung job than the one Becker had lost. He had to uproot his family from Wisconsin to Nevada. And, like many formerly jobless people who find work these days, Becker is now paid far less than before — $25,000 less.

It's one of the bleak realities of the economic recovery: Even as more employers are starting to hire, the new jobs typically pay less than the ones that were lost.

In the government's data, a job is a job. More jobs point to a growing economy. But to people who used to earn $60,000, a new $40,000 job means they'll spend less — and contribute less to the recovery.

"In most cases, it means a subdued expansion, for sure," said Marisa Di Natale, director at Moody's Economy.com.

Worse for those affected, people hired at lower wages in a tight job market tend to lag behind their peers for years, sometimes decades. For example, workers laid off during the 1981-82 recession earned 20 percent less than people who remained in a job — even 20 years after they were rehired, a Columbia University study found. The study examined pay for white- and blue-collar workers, managers and hourly workers.

That means a few short months of unemployment could haunt workers such as 34-year-old Jessica Moore for years.

Moore had been employed since graduating from Penn State University more than 12 years ago. But in March, she was laid off from her job as managing editor for digital media at the nonprofit Sesame Workshop in New York, which produces "Sesame Street."

In April, Moore got an interview for a job opening as editor and publisher of the nonprofit Teen Voices magazine in Boston. The job paid 25 percent less than her previous position. And the company was a fraction the size of Sesame Workshop.

Still, she leapt at the offer.

"I wanted the immediate security," she said.

It's hardly surprising that employers are being stingy with pay these days. Their own businesses were squeezed by the recession. Most depend on consumer spending, which remains tepid.

The first jobs to emerge from a recession typically aren't well-paying ones, says Till Marco von Wachter, a Columbia economics professor. Companies delay hiring for higher-paying jobs, in particular, until they're confident the recovery will last, he says.

In addition, as the unemployed compete for the few job openings available, employers face no pressure to raise wages. More than six people are now vying, on average, for each job opening, according to Labor Department data — compared with just 1.7 workers per opening when the recession began in December 2007.

That's why Becker considered himself lucky to get a job offer this summer as an information-technology manager after months of searching. That was even though he had to move his family from Milwaukee to Reno, Nev., and take less pay than he'd been used to.

"I think a very large number of people will never have the life they had at one time," he said.

Becker, 48, oversees fewer than a dozen employees, compared with the 60 he managed before the recession when he earned $25,000 more, or $150,000. He drained $100,000 in savings to support his family during a year of unemployment to pay his mortgage, health insurance and college tuition for two children.

Though his current job is a step down, he wasn't prepared to hold out for a better and higher-paying one. Too many other workers were lined up for each opening he sought.

John Irons, research and policy director for the Economic Policy Institute in Washington, says that as millions of unemployed workers accept lower pay for new jobs, their collective wage cuts will likely stifle income growth for years.

Inflation-adjusted hourly wages rose throughout most of 2008 but peaked at an average $8.65 in May for non-management hourly employees, as measured in 1982 dollars, according to Labor Department data. (Unadjusted for inflation, the average was $18.53.) Since then, inflation-adjusted wages have fallen 1.3 percent to an estimated $8.54.

The resulting wage depression is part of the economic "scarring" of the labor force, Irons said. For example, inflation-adjusted wages stagnated for four years after the downturn of 1991. And they remained mostly flat from 2002 to 2005, after the mild recession of 2001, according to Labor Department data.

"You can't spend what you don't have," said 35-year-old Travis Becker, who took a 12 percent pay cut when he was hired in July.

Becker (no relation to David Becker) had been laid off a few months earlier by a Minnesota company that installed concrete pieces for commercial projects.

Pay cut or no, Becker is grateful to have a job at Wells Concrete in rural Albany, Minn. Becker moved his family from a small town near Minneapolis, lost his seniority and took a job with less responsibility.

"There's no other choice," he said. "It's job or no job."

Becker said he and his wife will remain as frugal as they have been after he was laid off. They dine out rarely and spend mainly on necessities for their three children.

Consumers already are saving more and spending less than they normally do, because of high debt and tight credit. With Becker and other newly hired workers keeping tight grips on their wallets, consumer spending could stay weak well into the recovery, sapping its strength. How much will hinge on how long and how deeply wage growth lags...

7 million lost jobs: Gone forever?

The Next Real Estate Bust

January 7, 2010

Reuters - Now that Roger Lowenstein has published an article in the NYT Magazine headlined "Walk Away From Your Mortgage!", I think we can safely stay that what started as a controversial and minority stance has at this point become thoroughly mainstream...

Houses are still more expensive to buy than to rent, in most of the country, and of course financing is all but impossible to come by, except for that provided by the government, which means that if and when the government prop is taken away, prices are liable to plunge. If that happens, expect a lot more walking away into cheaper rentals than we’re seeing right now, and a whole new vicious cycle of price declines and foreclosures...

Personal Bankruptcy Filings Rising Fast

January 6, 2010

Wall Street Journal - The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, a surge largely driven by foreclosures and job losses.

And more people are filing for Chapter 7 bankruptcy, which liquidates assets to pay off some debts and absolves the filers of others. That is significant because a 2005 overhaul of federal bankruptcy laws aimed to encourage Chapter 13 filings, which force consumers to sign onto debt-repayment plans in exchange for keeping certain assets.

The changes were designed to make it more difficult for people to shed their debt, particularly in a Chapter 7 filling. A "means" test, for example, was introduced to separate those who could afford to repay their debt from those who couldn't. A Chapter 7 filing is off the table if the means test determines a person is able to pay back at least a portion of the debt after it is restructured.

The worst U.S. recession in a generation is testing the effectiveness of these laws. The economic downturn also has prompted more middle-class Americans to file for bankruptcy protection.

Overall, personal bankruptcy filings hit 1.41 million last year, up 32% from 2008, according to the National Bankruptcy Research Center, which compiles and analyzes bankruptcy data. It is the highest level of consumer-bankruptcy fillings since 2005. Consumers rushed to file in 2005 before the new bankruptcy laws took effect in October of that year.

Chapter 7 filings were up more than 42% as of November 2009, compared with the same period a year earlier, according to the research center. November is the most recent month with analyzed data available. Chapter 13 filings rose by 12% and made up less than a third of 2009 filings as of November.

"That suggests it was largely ineffective," Ronald Mann, a law professor at Columbia University, said of the 2005 overhaul. "I don't think anybody who's knowledgeable about the bankruptcy system thought the statute was well crafted."

During this recession, the housing crisis and high unemployment rate have prompted more people to file for bankruptcy who may never have considered the option before, experts said. Filings from 2008 showed more people with high income and high education levels resorting to bankruptcy petitions, according to an annual survey of consumer-bankruptcy filers' demographics by the Institute for Financial Literacy, a nonprofit that provides bankruptcy-related counseling and education services. Those demographic trends appeared to continue last year.

Mr. Mann said he believes bankruptcies reached their peak sometime last year, but bankruptcy attorneys from across the country said there was no sign that business was slowing. The 113,274 filings in December alone were a third higher than the same month a year earlier.

"I can't see over the top of the files on my desk," said Cathleen Moran, a bankruptcy attorney at Moran Law Group in Mountain View, Calif., likening it to the rush of clients before the revised law went into effect.

In a three-month period before those rules changed in 2005, her firm filed five times as many cases as usual.

Ms. Moran's clients in 2008 typically were people who earned between $40,000 and $80,000. That changed last year when a rash of people who earned $100,000 to $300,000 began filing as well, she said.

"Expenditures that were rational when these people were working at the peak of their salary just are no longer sustainable when they lose jobs or take jobs at a third or a half of what they were making before," Ms. Moran said.

Craig W. Andresen, a Bloomington, Minn., bankruptcy attorney, handles between 20 and 30 cases a month, but said that in most years that slows to between five and 10 in December, as people use the holidays to divert themselves from their financial problems. This year he had a full load of cases through year's end.

"Everyone has said, 'Wow, I stayed busy all month.' I've never heard [bankruptcy lawyers] in December say that they're busy and don't want to take time away from their office," he said. "People are committed to filing because they don't think their finances are going to turn around"...

Mortgage Foreclosures Still Swamping Federal Efforts to Help

January 4, 2010

McClatchy Newspapers - Banks and other lenders are still foreclosing on Americans' homes at a rate that's outpacing the Obama administration's main effort to stem the crisis. The Treasury Department's Home Affordable Modification Program has started the mortgage modification process for almost 760,000 homeowners, less than 5 percent of those workouts have become permanent. One member of the Congressional Oversight Panel that monitors the program called it "a failure"...