Inflation swallows raises in the Washington area


(Jeffrey MacMillan/For Capital Business)
September 25, 2011

As salary increases have gotten smaller in recent years, you might have consoled yourself with the knowledge that at least you were staying ahead of inflation. Now you may not even be able to count on that.

For the first time since 1979, the increase in salaries in the Washington area was less than the rate of inflation. Wages as a whole for metropolitan Washington rose just 0.04 percent in 2011, a new salary survey found. The rate of inflation in the region shot up to 4.1 percent in July (the latest month for which the figure is available) compared to a year ago.

“If you earn $100,000 and get a 2 percent increase and the rate of inflation is 3 percent, you’re already in the hole $1,000,” said Angelo Kostopoulos, president of Akron Inc., a District-based research firm that compiled and analyzed survey data for the Human Resource Association of the National Capital Area.

With its abundance of highly educated and highly skilled workers, the Washington region traditionally has posted salary increases above the national average.

The results of the survey reinforce the inextricable link between federal spending and the local economy: When federal spending grows, the region prospers. But when the government tightens its belt, the region feels the pinch.


Chief Information Group partners Mike Green and Mike Whitecar took pay cuts and reduced raises for their 30 employees to 1.5 percent from 3 percent as a result of the government paying contractors less. (Jeffrey MacMillan/For Capital Business)

“When the government says we need to cut [spending for contractors] 15 percent, that 15 percent gets passed down to little guys like us,” said Michael Whitecar, president of The Chief Information Group, a Falls Church-based contracting firm that provides information management for military hospitals.

Because the government is paying contractors less for the same services, Whitecar said, he and his partner took pay cuts and reduced raises for their 30 or so employees to about 1.5 percent from 3 percent last year. “We’re scrutinizing salaries a lot more than we did in the past,” he added.

Federal workers are not included in the salary study. Still, a federal wage freeze for fiscal 2011 and 2012 likely depressed private sector salaries as employers there often use federal wages as a barometer, experts said.

Smaller raises mean less money will be churning through the economy. The difference between the 2011 payouts and 2010’s 2.3 percent average raises is about $122 million. And that figure only counts the 75,000 employees who hold positions covered by the survey. The total would certainly go much higher when considering the thousands of other workers in the area, Kostopoulos said .

Moreover, some 380,000 metropolitan Washington residents work in the federal government, and experts estimate that the government’s wage freeze will cost the local economy hundreds of millions of dollars this year and next year.

Business watchers say the lack of a sizable raise is not likely to choke the region’s economy as it did in 1995, when a government shutdown kept thousands of federal staffers out of work. But it will surely affect all sorts of purchase decisions, from haircuts, to clothing, to cups of latte, to that new hybrid SUV.

People will “keep their belts tightened for another year, that will have an impact on the malls,” said Jim Dinegar, chief executive and president of the Greater Washington Board of Trade. “This is shaping up to be a lousy holiday season in Washington.”

“They won’t undertake new expenses. We may see this at car dealers,” Dinegar added. “You’re going to see a lot more people rent [houses] instead of buy.”

Some do better than others

More than 300 employers participated in the survey, including CACI International, Inova Health System, Choice Hotels International, American Red Cross, Gannett and Pepco, and more than 500 job categories were examined.

Most of the salary increases were modest, such as a 2.3 percent change in pay for business development managers.

Some job categories showed dramatic shifts. For instance, mid-level recruiter II salaries jumped a median of 23.9 percent to $66,900 from $54,090. Salaries for applications managers dropped 8.9 percent to $65,750 from $72,110. Researchers say the changes reflect the demand for the positions and staff turnover among the survey participants — with either higher paid workers replacing lower-paid ones or vice versa.

With their tight budgets, employers increasingly are shifting from giving everybody something to designating large chunks of their raise pool to top performers in critical positions.

“They’re not going to spread it out like peanut butter,” said Paul Rowson, managing director of WorldatWork, a District-based nonprofit organization that tracks compensation. “They’re going to target their top performers to make sure they’re not poached in this environment.”

For now, it unlikely that better raises will return soon.

For instance, Dinegar of the Greater Washington Board of Trade pointed to the pressure law firms are under from clients to reduce the amount they charge for billable hours, a demand that is forcing them to push down pay for associates and even partners.

Many businesses, he added, have opted to cover their vacancies with temps instead of higher-paid full-time employees, holding down wage growth.

Contractors see pay hikes cut in half

Few sectors have seen salaries drop more than government contracting, which traditionally has employed some of the highest-paid workers and given the largest raises. The average wages for District residents in the professional and business services sector, which includes contracting firms, was $114,497 in 2009, according to a separate Brookings Institution analysis of data from Moody’s Analytics.

Raises in the sector were nearly cut in half: The median salary rose 2 percent in 2011, compared with 3.9 percent the year before, according to the human resource association salary study. Wages this year rose in 109 job categories in the sector, while declining in 140.

“The job market is getting tighter and there are fewer and fewer pay increases, except in the high technology jobs,” said Alan Chvotkin, executive vice president and counsel of the Professional Services Council, which represents government contractors.

“The price the government pays for goods and services also is getting tighter,” Chvotkin added. Contracting “companies, to stay competitive, are looking at their salary structure.”

That is even the case at the upper end of the salary spectrum, in high-demand jobs requiring security clearances, according to the survey. For the first time in memory, the growth in premiums paid to secret, top secret and top secret special access privilege positions is slowing, Chvotkin said.

The pressure is likely to increase. Last week, as part of his effort to reduce federal spending, President Obama proposed a new limit on executive salaries at government contracting firms. Currently, the government uses a formula that reimburses contracting firms up to $693,951 for their executives’ pay. Under the proposal, they would only get $200,000.

The proposal would have “a significant impact on the ability of companies to compete for executive talent in the marketplace,” Chvotkin said. “It will impact companies of all sizes. The hardest hit are small and mid-tier firms trying attract executive talent to help them grow.”

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