Why Wages Aren't Flexible

Becker-Posner on reasons why wages don't change with slackened demand.

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I wrote recently about the value of implementing workforce-wide pay cuts in lieu of layoffs, as there is some research indicating the pay cuts would shorten the duration of a recession. We don't however, see companies use them very often.

Here's an excerpt from the Becker-Posner blog on why wages tend to be inflexible:

Unfortunately, not all prices are flexible; wages especially are not. This is not primarily because of union or other employment contracts. Few private-sector employers in the United States are unionized and as a result few workers (other than federal judges!) have a guaranteed wage. The reasons that employers generally prefer to lay off workers than to reduce wages when demand drops are first that by picking the least productive workers to lay off an employer can increase the productivity of its work force; second that workers may respond to a reduction in their wages by working less hard, and, conversely, may work harder if they think that by doing so they are reducing the likelihood of their being laid off; and third that when all workers in a plant or office have their wages cut, all are unhappy, whereas with lay offs the unhappy workers are off the premises and so do not incite unhappiness among the ones who remain.

Do you agree with Posner's reasons?


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