Why Wages Dont Fall During A Recession

A deep question in economics is why wages and salaries don't fall during recessions. This is not true of other prices, which adjust relatively quickly to reflect changes in demand and supply. Although economistshave posited many theories to account for wage rigidity, none is satisfactory. Eschewing "top-down" theorizing, Truman Bewley explored the puzzle by interviewing--during the recession of the early 1990s--over three hundred businessexecutives and labor leaders as well as professional recruiters and advisors to the unemployed. By taking this approach, gaining the confidence of his interlocutors and asking them detailed questions in a nonstructured way, he was ableto uncover empirically the circumstances that give rise to wage rigidity. He found that the executives were averse to cutting wages of either current employees or new hires, even during the economic downturn when demand for theirproducts fell sharply. They believed that cutting wages would hurt morale, which they felt was critical in gaining the cooperation of their employees and in convincing them to internalize the managers' objectives for the company.Bewley's findings contradict most theories of wage rigidity and provide fascinating insights into the problems businesses face that prevent labor markets from clearing.

In Why Wages Don't Fall During A Recession, [Truman Bewley] tackles one of the oldest, and most controversial, puzzles in economics: why nominal wages rarely fall (and real wagesdo not fall enough) when unemployment is high. But he does so in a novel way, through interviews with over 300 businessmen, union leaders, job recruiters and unemployment counsellors in the north-eastern United States during the early1990s recession...Mr. Bewley concludes that employers resist pay cuts largely because the savings from lower wages are usually outweighed by the cost of denting workers' morale: pay cuts hit workers‚standard of living andlower their self-esteem. Falling morale raises staff turnover and reduces productivity...Mr. Bewley's theory has some interesting implications...[and] has a ring of truth to it.

I think any scholar interested in labour markets and wage determination should read this well-written, lively, and highly stimulating book...[It] provides a fresh view and a lot of complementary background knowledgeabout how experienced people in the field see the employment relationship and what is actually crucial. Knowledge of this sort is all too rare in economics, and Truman Bewley's truly impressive study can serve as a role model for futureinvestigations.

Truman F. Bewleyis Alfred Cowles Professor of Economics at <>Yale University.

Acknowledgments

1. Introduction

2. Methods

3. Time and Location

4. Morale

5. Company Risk Aversion

6. Internal Pay Structure

7. External PayStructure

8. The Shirking Theory

9. The Pay of New Hires in the Primary Sector

10. Raises

11. Resistance to Pay Reduction

12. Experiences with Pay Reduction

13. Layoffs

14.Severance Benefits

15. Hiring

16. Voluntary Turnover

17. The Secondary Sector

18. The Unemployed

19. Information, Wage Rigidity, and Labor Negotiations

20. Existing Theories

21.Remarks on Theory

22. Whereto from Here?

Notes

References

Index