As part of the excellent Lectures on Macroeconomics series, Arnold Kling discusses why companies tend to cuts jobs rather than wages in times of hardship. The core arguments:
Cutting wages is not standard practice, therefore:
- The best workers will leave and seek better opportunities: it’s better to choose which workers to lose.
- Wage cuts demoralise, harming productivity.
However, there are rare circumstances that call for wage cuts:
- There is general deflation. Cuts will “keep wages from rising relative to prices and productivity”.
- A major sectoral decline requires it, in order to help maintain employment.
It’s interesting to note that, according to a recent survey, the primary concern for 69% of American workers is keeping their job, yet only 17% would be willing to take a pay cut to keep their job.