Thursday, January 23, 2014

Why firms do not like cutting wages

Nominal wage downward rigidity is a feature of many macro-models that help justify positive optimal inflation rates. In fact, that is pretty much the only way to get a monetary monetary model not to conclude that the Friedman Rule and its deflation is optimal. This rigidity is always assumed on the presumption that somehow employers and employees do not like to reduce nominal wages. Are they subject to a nominal fata morgana or is there more to it? Instead of pontificating from theory and limited data, maybe asking market participants could help.

Philip Du Caju, Theodora Kosma, Martina Lawless, Julian Messina and Tairi Rõõm conducted a survey of firms across 14 European countries. They conclude that issues with unions contracts or collective bargaining were of secondary importance to worker morale and staff retention. This means that including renegotiation costs seems misguided. This does, however, not explain why this is so important to staff morale. After all, what really matters is the real wage. What is this psychological factor that makes us think foremost in nominal terms? Or is it that managers only have the impression that this matters? What we need here is some experimental data where some employees are hit with a nominal wage decrease and others not, and see whether it makes a difference. Good luck finding a manager willing to do that, though. And I wonder whether the surveys results would be different in economies where the social mission of employers is less developed.

1 comment:

Jim Rose said...

wages are flexible,

see What can wages and employment tell us about the UK’s productivity puzzle? by Richard Blundell, Claire Crawford and Wenchao Jin at showing that in the Uk recession 12% of employees in the same job as 12 months ago experienced wage freezes and 21% of workers in the same job as 12 months ago experienced wage cuts.

20% of british wob stayers experiencing a nominal wage cut has been the case since as far back as 1991. Larger firms lay off workers; smaller firms tended to reduce wages

Their data covered 80% of workers in the New Earnings Survey Panel Dataset.