Bryan Caplan  

Is Downward Nominal Wage Rigidity on the Way Out?

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More than one economist has told me that nominal wage rigidity is getting weaker during this recession.  Now some journalists are saying the same thing (HT: Jacob Oost):

More squeezed employers, though, are seeking an alternative to layoffs. They're turning to pay freezes, pay reductions and other cost-cutting options, such as ending their contributions to 401(k) accounts.

"All of that hurts, but nothing hurts more than losing a job," said Allen Sinai, chief global economist at Decision Economics Inc. "It is a growing trend as companies try to cut costs. Going forward, we will see more of this, absolutely."

The Federal Reserve has taken notice. In a recent survey of economic conditions, it observed that in some parts of the country, companies were resorting to "pay freezes or reductions in compensation."

A wide range of employers have followed suit. In some cases, they're imposing pay freezes or cuts to avoid immediate layoffs, though economists say such steps tend to lead to layoffs anyway. In other cases, employers are cutting or freezing pay and laying off workers.

Is this stuff just anecdotal?  Or is there some real data showing that labor markets have changed?

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COMMENTS (9 to date)
Trevor H writes:

How many anecdotes does it take to make data? Here's the Houston Chronicle:

Blackadder writes:

In some cases, they're imposing pay freezes or cuts to avoid immediate layoffs, though economists say such steps tend to lead to layoffs anyway.


Maniel writes:

Since Trevor already said what I wanted to say, I will add that in the small company my wife works for, they had a good old-fashioned firing (er, "reduction in force"). Meanwhile, in the small company I work for, we had "an anecdote." My wife's company experienced a serious morale issue (the "who's next?" problem); my company got a morale boost ("we're all in this together").

botogol writes:

KPMG in Europe have just launched an imaginative scheme

rpl writes:
How many anecdotes does it take to make data?

It doesn't matter how many anecdotes you have; it's still not data. In order to make it data you have to take some reasonable steps to ensure that you have an unbiased sample. Note, for example, that news outlets tend to report on the unusual rather than the commonplace, so they're not a good source for unbiased data.

Daniel writes:

Employees of New York's Metropolitan Opera were told last week that all non-union employees would receive a ten percent pay cut effective July of this year. The Met's administration also announced that several members of the Opera's administrative and support staff would be let go over the next few weeks.

bob writes:

does the documented rise in the portion of the work force working as consultants, contractors and temporaries tend to confirm weakening wage stickiness?

Jacob Oost writes:

My own theory is that this can work just fine and will be more widespread ONLY during prolonged recessions that the media hypes up, and probably only in the less human-capital-intensive jobs.

F'instance, I can't imagine computer engineers putting up with a non-trivial pay decrease, as such valuable human capital will just wind up leaving for employers smart enough to snatch them up.

R Houck writes:

I believe this issue to be more concrete than anecdotal. In this recession it is difficult to not feel monetary restraints in any industry. I myself work for a local governmental entity that runs a community transportation system. We have yet to come to the point of lay-offs and pay reductions, but instead we are faced with the issue of potentially having to cut service due to loss in funding. This is alarming to me because when the costs of personal transportation goes up public/community transportation needs increase. My question is with service being cut what will happen to those people who truly rely on public transportation to get them to the places they need to be?

On another note, with the cutting of transportation services it is inevitable that lay-offs, workforce reductions, and/or other methods to reduce operations costs will occur. I feel this will only be a band-aid to fix growing economic problems. How will blue collared Americans react to these occurrences? My worry is that methods such as there will cause a backfire within many industries ultimately having negative impacts on the public.

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