Salaries for new hires fell 15% during recession – study

Salaries for new hires fell by an average of 15 per cent in the years 2005-2014, as employers responded to a surge in unemployment by cutting earnings for new employees, a new study from the Central Bank shows. However the authors noted that right at the end of 2014, as unemployment continued to decline, earnings for new hires started to improve.

The study showed that while many people were grateful simply to get a job during a recession, it was a bad time to get hired as employers tend to lower what they offer new hires.

This means that if you started a new job during the recession, you may have been offered 15-20 per cent lower than what a similar job would have paid before the downturn. Average hourly earnings for new hires fell from €13 in 2007 to €11 in 2013.

The Central Bank said the finding is “remarkably robust” and echoes previous studies in the United States, which show that when unemployment rises by about 5 per cent, earnings for new hires drops by 7.5 per cent.

The rise in unemployment was about double that in Ireland during the recession, which accordingly gives rise to the 15 per cent drop in new hire earnings.

The findings of the study are more stark than a previous report from Central Bank author Reamonn Lydon, which showed that during the early-1990s slowdown, new graduates' earnings fell by about 8 per cent, significantly less than the 15 per cent decline across all earnings evidenced in this report, although the rise in the unemployment rate this time around was much higher than during the 1990s (c10 per cent compared with 2 per cent).

The study considers “new hires” to include: new graduates; “inactive” workers, ie those who worked in past and exited the labour market for family or other reasons; and the unemployed.

The average age of new hires in the study was 32-33, which shows that even those with considerable experience suffered a decline in starting rates of pay during the recession.Those who simply changed their job during the recession do not appear to have suffered from a similar cut in earnings.

Professional earnings

The study found more highly educated workers escaped the worst of the cuts, as their earnings appeared to be less correlated with a rise in unemployment, but the decline was even greater than 15 per cent for those with lower levels of education, while employees aged between 45-60 also fared worse than younger workers.

“Earnings of new hires from unemployment tend to become more sensitive to the state of the business cycle when workers are likely to have less attractive outside options. These are typically workers with lower education or workers that are older, yet not sufficiently old to wait out the unemployment spell until they become eligible for retirement,” the report said.

The findings showed no distinction between public and private sector workers during the period.

The data was based on the pre-tax earnings of employees in Ireland between 2005 and 2014 with the data from 2013 Household Finance and Consumption Survey.