Oil workers will have to make the choice between layoffs and pay cuts

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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.

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.

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.

Andrew Burton/Getty Images

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.

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