Why Firms Avoid Cutting Wages

Abstract

Firms very rarely cut nominal wages, even in the face of considerable negative economic shocks. The authors of this article use a unique survey of 14 European countries to ask firms directly about the incidence of wage cuts and to assess the relevance of a range of potential reasons for why the firms avoid cutting wages. They examine how firm characteristics and collective bargaining institutions affect the relevance of each of the common explanations for the infrequency of wage cuts. Concerns about the retention of productive staff and a lowering of morale and effort were reported as key reasons for downward wage rigidity across all countries and firm types. Restrictions created by collective bargaining were found to be an important consideration for firms in Western European (EU-15) countries but were one of the lowest-ranked obstacles in the new EU member-states in Central and Eastern Europe.

Can cutting pay be an alternative to cutting people when maintaining work attitudes is a concern? It can be if employees trust you

“…In all of the low trust samples, employees who survived downsizing exhibited a higher level of work attitudes than the employee who had their pay cut. The results are in alignment with the widely held concerns of practitioners that cutting pay would be more detrimental in managing work attitudes than downsizing (Bewley, 1998, 1999; Du Caju et al, 2015).…”

“…In all of the low trust samples, employees who survived downsizing exhibited a higher level of work attitudes than the employee who had their pay cut. The results are in alignment with the widely held concerns of practitioners that cutting pay would be more detrimental in managing work attitudes than downsizing (Bewley, 1998(Bewley, , 1999Du Caju et al, 2015). The studies in this paper, however, also demonstrate that cutting pay can be a feasible alternative to downsizing (in terms of maintaining work attitudes) when the level of trust in management is high.…”

Need to cut or freeze pay of your employees? Providing work–life balancing practices can help if maintaining employee morale is a concern

“…In fact, several studies on this topic utilizing data collected before the second half of 2008 try to answer the question of “why firms do not cut pay?” (e.g. Bewley, 1998, 1999; Du Caju et al ., 2015).…”

Can Overtime Premium Flexibility Promote Employment? Firm- and Worker-Level Evidence from a Labour Law Reform

“…In the case of working time, the evidence available (such as Hunt (1999), Crepon & Kramarz (2002) or Chemin & Wasmer (2009)) is generally pessimistic about the potential of working time reductions to increase employment, underlining the relevance of the 'lump of labour fallacy'. In the case of wage flexibility, there is a continuing debate in academia about the magnitude and effects of downward nominal pay rigidity (Fehr & Goette 2005, Dickens et al 2007, Elsby 2009, Babecky et al 2010, Martins et al 2010, Babecky et al 2012, Caju et al 2015. However, the comparative evidence from the financial and sovereign debt crises highlights the potential of wage flexibility in promoting employment resilience if one compares Anglo-Saxon and Souther European labour market performances (Carneiro et al 2014, Doris et al 2015, particularly in low inflation environments.…”