Why wages are "sticky" downwards

[erudito]

It is an established fact of economic life that wages are “sticky” downwards. That is, that sacking people is typically resorted to more than cutting wages to existing employees. There is no doubt a vast economic literature on this, one that I have not read. Nevertheless, as part-owner of a business that pays some people are regular weekly

Comments

[somercet]

Arnold Kling has some interesting insights on why shedding employees may be a better idea.

Yes and no

[erudito]

While I do not directly disagree with his observations, they are too "macro". The effect on the on-going relationship (and, for that matter, potential future employees) strikes me as much more important.

Re: Yes and no

[somercet]

Giving workers a choice can change things. If a company had an employee vote on wage cuts or downsizing, the employees would share the blame for cutting wages and this would diffuse much of the anger. The bigger the company, the harder this might be to do.

Of course, if you have a union declaring this choice to be a conspiratorial plot, then you would probably just do layoffs. Also, to make a cut work, managers would have to take one too. Perhaps we're assuming too much bravery to people we don't know.

OTOH, a dip in profits can be a perfect opportunity to drop a chronic red-ink division. *shrug*