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However, there is no credible way for any firm to tell its employees, "You are getting a wage cut, but don't worry. It's just for macroeconomic reasons."
That's Arnold Kling. Here is much more.
Posted by Tyler Cowen on November 11, 2008 at 01:45 PM in Economics | Permalink
Comments
Really? My experience is that this happens fairly often. My Fiance works for a large HMO, they've called a all-everybody meeting in two weeks. Be There, no exceptions.
The rumors are apparently more towards pay cuts than layoffs. No one is surprised that might be the case.
Posted by: talboito at Nov 11, 2008 2:02:53 PM
I thought Germany had just gone through a couple of years of slightly decreasing nominal wages.
Very often, employees also have fixed wages plus a variable bonus. The variable bonus can be-and is sometimes effectively-lower than the preceding year.
Finally, it is probably true that there is some downward nominal-wage stickyness for any given company. But it would be a fallacy of composition to translate this to the whole economy. When employees are laid off, nothing prevents their new employer from offering them a lower wage.
Posted by: Gu Si Fang at Nov 11, 2008 2:21:06 PM
When employees are laid off, nothing prevents their new employer from offering them a lower wage.
That's what the post talks about : why does the economy as a whole tend to adjust mostly by means of layoffs, instead of mostly by means of wage cuts. Read the whole thing, as they say.
Posted by: The Sheep Nazi at Nov 11, 2008 2:39:46 PM
Japan, Wall Street and others do have systems where a very large share of the worker pay is in the form of an annual bonus that allows firms to effectively cut wages without cutting the base pay or laying workers off. In Japan even the public sector employees were part of the bonus system.
This was an essential element of the Japanese "lifetime" employment that worked very well in their postwar era of rapid growth and full employment.
Posted by: spencer at Nov 11, 2008 3:34:46 PM
When you cut wages across the board, your best workers would be the first to leave.
Posted by: angus at Nov 11, 2008 4:25:13 PM
I have certainly experienced the equivalent, 'just because the cpi has risen, you shouldn't expect a raise'.
Posted by: Lord at Nov 11, 2008 4:50:46 PM
An argument for fairly low constant inflation. It's much easier to not offer a raise.
Posted by: josh at Nov 11, 2008 5:59:54 PM
An argument for no inflation, and make the b*st*ds look you in the eye, if they want to cut your pay that badly.
Posted by: The Sheep Nazi at Nov 11, 2008 7:47:49 PM
"An argument for fairly low constant inflation. It's much easier to not offer a raise."
Wouldn't that be high constant inflation. The higher the inflation, the more an employer can cut real wages while not cutting nominal wages.
Posted by: mw at Nov 11, 2008 11:53:29 PM
To the original question, without reading the whole thing, my guess is because the employer's prices don't go down unless they're selling something like commodities. An employee can make 5 widgets an hour and each widget is 20 dollars. The widget might still be selling at 20 dollars, but customers are only now demanding 3 of them while the employee is capable of making 5.
If the employer could cut wages, the employee would work less. It happens with hourly workers, unionized and non-unionized, but that doesn't happen for salaried employees with rigid working hours. Even if it could happen for salaried employees, the company would still have the fixed benefit and overhead costs of the employee. It's easier to keep it at 5 widgets per salaried employee, especially when that becomes 6 after the least productive workers are laid off.
Posted by: mw at Nov 12, 2008 12:00:39 AM
I think that there is a way to show workers that the wages are being cut for "good" macroeconomic reasons. The measured unemployment rate and the CPI.
The first, however, requires that there is an output effect, and only then can nominal wage deflation allow a recovery at lower level of prices and wages.
Avoiding the need for nominal wage deflation still seems like a better approach to me.
During the thirties, however, the dominant view was that falling nominal incomes would exacerbate the recession.
While the notion that keeping prices and wages high in the face
of falling demand will help things has little support among
economists, during the years of Keynesian dominance, a lot of
rather weak arguments were used to claim that a deflation of prices would leave the economy depressed.
And most of the monetarist opposition had little interest in fighting that battle, instead favoring a monetary policy that
supports aggregate demand. (I count myself in that group.)
Anyway, my point is that "good macroecnomic reasons" to cut wages requires that workers have an understanding of economics
that has been controversial among ecnomists in the modern era.
Posted by: BillWoolsey at Nov 12, 2008 6:57:58 AM
If every firm in an employement sector were cutting wages, then the good workers couldn't go anywhere else to get better pay. I admit, it certainly seems risky to be the first to cut wages, but if it were expected within the sector, as some of the preceeding posts imply it is within the insurance industry, then few employees would react to it before other firms followed suit. There is also a "comfort" factor; i.e., I am more comfortable with the devilish employer I know rather than the new employer I don't.
Therefore, I think an argument can be constructed in either direction. We could argue that it is better from the firm's perspective to layoff employees, and then turn around and use the same evidence to argue that firms are better off cutting wages. There is also a third possibility: cutting hours. Salaried positions wouldn't be effected by this in theory, but we could certainly give many people more free time without firing them. Layoffs cause a huge amount of demoralization, just as cutting wages or hours does.
So, given these three possible responses to a downturn in demand, I think we can reasonably model each one mathematically and really see which option has the desired effect. Of course, since the firm is trying to cut production AND expenses, it seems likely that any of the three would produce roughly the same outcome. Workers will be unhappy and expenses and production will both be reduced.
I think this ultimately comes down to a positive vs. nominal discussion. Which of the levers should we pull in this situation? One hurts some people a lot, the other two hurt everyone a little. The difference is whether we want to bring people closer together in economic standing, or allow some people to suffer economic hardships while others avoid them. Obviously, we prefer for some to suffer than for all, even though the total suffering seems to be about the same.
Posted by: George at Nov 12, 2008 11:55:52 AM
Kling assumes that wage cuts must be indiscriminate and across the board, so that the firm's best workers will leave. But if you can identify the losers you want to lay off, you could also offer them and some others selective wage cuts so as to keep marginal cost below marginal revenue product. Picking out the smallest possible set and giving them 100% wage cuts (layoffs) is an extreme solution--why would this be optimal in general?
Posted by: srp at Nov 12, 2008 7:38:38 PM
A paragraph of wisdom:
The free market is just a measurement, a device to tell us what people are willing to pay for any given thing at any given moment. The free market is a bathroom scale. You may hate what you see when you step on the scale. "Jeeze, 230 pounds!" But you can't pass a law making yourself weigh 185. Liberals think you can. And voters--all the voters, right up to the tippy-top corner office of Goldman Sachs--think so too.
Posted by: at Nov 12, 2008 10:01:30 PM
Liberals think you can. And voters--all the voters, right up to the tippy-top corner office of Goldman Sachs--think so too.
The author of this quote ought to vote, provided he is a citizen who can vote.
Posted by: J Thomas at Nov 15, 2008 9:24:11 AM
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