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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Salary Cuts In Energy Sector Could Prevent Mass Layoffs

For many oil gas workers both in the U.S. and around the world, the current oil price malaise may mean layoffs and struggling to find a new job. A new report from the Hayes Group highlights the challenges in the sector. The report found that 93 percent of employers had already made some headcount reductions, and 32 percent of responding workers indicated they had been laid off or made redundant.

Of that group, fully 72 percent were considering work outside the oil sector. The report was actually compiled in November before the most recent downward leg in prices so its conclusions are probably even more applicable today.

The Hayes Group report highlights how difficult conditions are starting to become in the oil and gas sector. The financial strains in the sector may ensure more layoffs are coming at oil and gas companies. Especially as production declines, the industry simply needs fewer workers. Despite that, salaries for the remaining workers are still relatively high at around $81,000 a year. Given that reality, layoffs are not inevitable. Instead, employees face a basic choice – layoffs or pay cuts. Related: Who Would Be The Best Presidential Candidate For Energy Companies?

Traditionally, American firms and many others have opted for layoffs as the default answer when facing recession or tough financial times. Yet there is something to be said for significant across the board pay cuts, which can help reduce employee anxiety and at the same time help firms retain talent in bad times while waiting for the good times to return. South Korea for instance, generally adopted the model of steep pay cuts in lieu of layoffs during the 2008 Recession. This approach helped the country weather the recession better than many other nations. American firms in the current oil crisis might adopt the same mindset and thus help stave off any significant brain drain. Related: IEA: Increasing OPEC Production Keeps Oil Prices Down

The prospective of a pay cut for everyone rather than the ax of layoffs might seem like an appealing prospect and a good choice to some. That’s not always a choice that employees are willing to make though. Even in the current environment, only about half of employees are willing to take a pay cut in the oil and gas sector. This reality is perhaps short sighted on the part of employees since those who do end up being laid off may have to change careers altogether and start at a new entry level position. That reluctance by workers is not entirely surprising though. Related: Hopes Fall on Emergency OPEC Meeting

Economists have long noted that wages and prices are sticky, meaning that while employees are happy to get a raise and businesses are happy to raise prices when times are good, they are loathe to accept pay cuts or lower prices when times are bad, even if it means lost business and jobs. That psychological barrier actually is economically inefficient. If prices are not flexible, then it makes it harder for markets to adjust and bring supply and demand back into balance. One byproduct of this is that unemployment rates will likely remain stubbornly high in the oil and gas sector for years to come as job seekers search in vain for a position that would pay as well as the one they lost.

Certainly for some workers who make it through the current crisis, not accepting a pay cut could be a wise decision. But for many workers it could prove to be a catastrophic choice if it leads to broader layoffs and inefficient labor markets in the energy sector.

Only time will tell how stubborn the industry will be, but basic economics suggests the most flexible firms and employees will be the ones that emerge in the best position at the other end of the downturn.

By Michael McDonald of Oilprice.com

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  • Ozair on February 10 2016 said:
    one of the option could be to index the S&W with the movement in oil price | revenue swing and a floor of say 50% with the base year below with which no pay cuts. subsequently all the accrued pay cuts are to be returned when oil price | revenue raise above the base line. other options could be to send workers on forced leaves for a month or two with no leaves fare assistance etc. that will guarantee the job and benefit the Companies in times of windfall crisis.
  • william on February 10 2016 said:
    Those of us that still have jobs, at least those of us not working in an office, have all ready taken pay cuts of from 10 to 30 percent.. Get real..Oil and gas companies will get rid of you in hard times.. Thats the way it has always been, and thats the way it will continue into the future... Welcome to the real world..
  • Ozair on February 11 2016 said:
    the said proposition is the win-win situation for all. laying offs | Getting rids are the easiest options in the world. one must think out of the box solutions in cutting costs as the same Companies will then cry for eligible resources once the situation gets better. the sanity must take precedence before cruelty.
  • R on February 11 2016 said:
    If you think the oil sands operations can't shut down, you're crazy. The oil sands are at their essence a mine. Mining is always, always at the mercy of world market prices, and is a walk-away operation. Yes it's true that shutting down the oilsands costs companies a fortune because of potential re-start costs, but what people don't count on is a major company walking away from a mine. Research the Cypress Anvil mine in Canada's Yukon. The oilsands are next. I lived it.

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