The financial fallout hits your salary

The credit markets are finally starting to thaw, but the next victim of the financial crisis, say economists, could be your salary.

South of the border, analysts are already predicting the longest slump in wages since the Great Depression. According to the New York Times, the inflation-adjusted median household income in the U.S. is now less than it was in 2000. By 2010, it could be lower still. Though Canadian salaries aren’t expected to plunge as deeply, forecasts from several big banks, including UBS, BMO and Scotiabank, say that a recession is imminent here too—which means you can forget about getting a raise. Economist and demographer Roger Sauvé says middle-class families should brace for an income slide over the next year or two. “Times will be tougher soon,” he says.

The income roller coaster is something Canadians are used to riding, especially during times of economic hardship. Data prepared for Maclean’s by Sauvé’s firm, People Patterns Consulting, show that during past recessions, after you strip out the effect of inflation, incomes have declined significantly.

In 1980, median family incomes hit a high of $45,000 (all amounts in 2006 dollars), but then they dropped off considerably by 1983. Gains were made in the late ’80s, but then an even deeper recession saw incomes drop to a low of $37,700 in 1997. Since then, earnings have been slowly creeping up, but we still haven’t fully recovered from the last recession: as of 2006, we were still making less than we were in 1980. “History repeats itself,” says Sauvé. “Whenever recessions happen, family incomes go down.”

According to Sherry Cooper, chief economist at BMO Capital Markets, a salary slump could translate into spending stagnation, which will further slow the economy. As consumers are forced to exercise restraint, commissions will be slashed and corporate profitability will go down. There has been a marked decline in economic activity already, she says. “Unfortunately, we are going to see consumers really cut back. More is likely to come.”