Bryan Caplan  

Wage Cuts: Do Well While Doing Good

Test-Marketing... Gerald Scully, RIP...
At CNN Money, Tyler explains how knowledge of behaviorial labor econ can save your job:

Employers looking to cut personnel costs can either lay people off or lower their wages. Though there are exceptions, employers are generally more willing to do the former.

Truman Bewley, a professor of economics at Yale University, has shown that's because they fear low worker morale and even sabotage. Basically, they don't want unhappy people around who may cause trouble.

So if your job really is in danger (and you'd rather have less money than no money) you need to address that fear head-on. Let the big guy know you're willing to work, contentedly and productively, at a lower wage than you currently receive.

Some possible openers: "I don't consider salary a final measure of my self-worth." Or "My friend Peter stayed on at his job at lower pay to help keep his company afloat. I really admire that."

When I press them, behavioral economists usually insist that the "don't cut nominal wages" norm is deeply ingrained in human nature.   Maybe they're right.  But that doesn't stop you from being the exception that proves the rule.  Why not echo Dexter Morgan by saying, "I'm not human"?

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COMMENTS (6 to date)
spencer writes:

If your theory is valid why is it that firms consistently lay off the most junior lowest paid employees.

Why don't they lay off the most expensive employees.

And the answer is not because of union rules.

Ben Hughes writes:

Spencer: What employees are "expensive" is entirely relative. If I'm a senior guy and I make $120,000 /year and produce $250,000 in business value to the company, whereas John makes $60,000 and produces $80,000 in business value, am I expensive or cheap? This is more about MRPL than flat salaries.

Companies are laying off junior low-paid employees because many of these employees are simply long-term bets the company makes hoping that in the future they can produce substantial business value. Many of them are not "cheap" in relation to the value they are providing _right now_ and companies are closing in more on short term objectives at the expense of longer term objectives in these tough economic times.

chipotle writes:

Bryan, this is silly. There's a perfectly good reason for people to resist wage cuts. Consider this hypothetical.

Your firm's profits declined 10% last year. So you come in and voluntarily offer to take a 5% wage cut.

Next year, due to spectacularly bad management, your firm's profits (they're still in the black), fallby 25%. Now the boss is hinting you should take another 10% haircut. After all, last year you suffered by 50% as much as the whole company, why should you object to by suffering only 40% as much?

Furthermore, why would you want to put yourself first in line for wage cuts? Maybe you're signaling that you're getting a large "employee's surplus" (consider it analogous to the "consumer's surplus").

Bottom line: if you know your business really well--e.g. know both their market position and can be sure of their trustworthiness as a company--then, sure, go in for a wage cut.

But, look, Bryan, you'd never take a wage cut if GMU wanted to do that to you. You'd jump ship to the first place that would pay you at your old GMU salary.

Even Cowen said this strategy wouldn't work in every sector.

Wage cuts are scary because you don't know where they'll end and you can't be sure you aren't being played for a sucker.

Colin Fraizer writes:

A different Dexter Morgan approach would be to surprise-sedate your boss. When awakes plastic-wrapped to a table, surrounded by pictures of previously-laid-off employees and you standing over him with a knife, he'll see the wisdom of looking elsewhere for savings.

Dr. T writes:

In non-union companies, economically "forced" personnel budget cuts can become an easier way to get rid of mediocre employees or to eliminate entire divisions that were never more than marginally profitable. I've seen this occur in the highly competitive medical laboratory testing industry.

Ben Hughes writes:

chipotle: Of course if you have other opportunities to make just as much money elsewhere (like Bryan does) you won't accept a wage cut. The point of the article is that when *faced with a strict tradeoff* between lower salary and risk of having $0 salary, it can be economically advantageous to accept a lower salary to lessen risk of layoff, but most people don't even consider this a possibility. Of course the the nature of this trade off is very different for each person which is what most of your argument amounts to.

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