Bryan Caplan  

Wage Rigidity in Of Human Bondage

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When economists say "wage rigidity," they almost always mean downward wage rigidity.  Nominal wages almost never come down.  Yet in W. Somerset Maugham's Of Human Bondage, set in late 19th-century England, upward wage rigidity plays an interesting role in the plot.  Maugham's twist on behavioral labor econ:

He told Philip that he should demand higher wages, for notwithstanding the difficult work he was now engaged in, he received no more than the six shillings a week with which he started. But it was a ticklish matter to ask for a rise. The manager had a sardonic way of dealing with such applicants.

"Think you're worth more, do you? How much d'you think you're worth, eh?"

The assistant, with his heart in his mouth, would suggest that he thought he ought to have another two shillings a week.

"Oh, very well, if you think you're worth it. You can 'ave it." Then he paused and sometimes, with a steely eye, added: "And you can 'ave your notice too."

It was no use then to withdraw your request, you had to go. The manager's idea was that assistants who were dissatisfied did not work properly, and if they were not worth a rise it was better to sack them at once. The result was that they never asked for one unless they were prepared to leave.
Has anyone experienced this sort of upward wage rigidity first-hand?

COMMENTS (16 to date)
Bryan Willman writes:

Yes, oddly. In a place where people were very highly paid.

But even given that, management and HR concluded (quite sensibly) that for *some jobs* there was a maximum market value. Consider for example a receptionist. She might be OK. She might be the best who has ever lived. The job is still worth only "standard receptionist wages". People weren't (to my knowlege) fired for asking for a raise, but there were job roles where one could max out, period. You want more money, get hired into a different job (which did happen.)

Flint Fredstone writes:

Seemed like standard practice at Wal Mart (in a sense): Walmart Worker Overtime Suit.

john hare writes:

I once worked for a company that paid union scale on union jobs where all wages were the same for any specific trade. No raises in sight when I left. I didn't fit in anyway.

Paul Crowley writes:

I'd be interested to know what economic theory or game theory predicts the effect of such a policy would be on wages.

Jeremy Norton writes:

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Glen Smith writes:

In retail, it is a pretty common practice. Although for wage earners, it is usually going to be implemented by things like not scheduling the worker or harassing the worker in a manner not illegal but enough to get him/her to quit.

Bill Poster writes:

Bryan - this is not wage rigidity as I understand it. Wage rigidity prevents wages from adjusting to equate the wage with the marginal product of labour (MPL). In this case, the worker asking for the raise either has an MPL high enough to justify it and receives the wage, OR is dissatisfied, in which case his MPL does not justify his current wage.

The application for a raise contains information that the manager uses to assess the worker and correctly determine his wage.

Put another way: where is the worker whose wage is lower than his marginal product?

David R. Henderson writes:

Yes, in my dealings with William F. Buckley, Jr. It's too long to tell as a comment. I'll probably post separately.

Glen S. McGhee writes:

You shouldn't ignore the historical and cultural context for this interesting exchange -- the manager's response was more about dealing with a worker that does not know his place, is not compliant.

The rigidity is social and institutional -- a caste system, if you like. It has nothing to do with wages.

This is what I have experienced working in the South.

johnson85 writes:

I know small business owners that have claimed the same thing, that when someone asks for a raise, you either need to give it to him/her or fire him/her because they're going to (a) look elsewhere regardless or (b) be difficult to deal with. But I don't think they practice it. That said, I do think they view the asking employee negatively if thye don't agree that the a raise is deserved, and it probably becomes a self fulfilling prophecy that things with the employee don't work as well after that.

blighter writes:

A somewhat similar system goes on at my current -- thus far -- employer. It is generally known that if you want a raise, you must bring in other, outside offers. But given that we are white collar professionals in a specialized industry, getting other offers involves a lengthy, weeks-long search, usually w/ a headhunter.

So by the time someone who feels they are due or overdue for a raise has worked up enough dissatisfaction to actually invest several weeks or even a few months in a job search and has actually *completed* that job search successfully, they effectively have one foot out the door. The belated, often somewhat-frantic efforts to retain their knowledge & expertise w/ matching offers & promises of other perks at that time always seem to fall into the 'too little, too late' category and off the people go.

Thus management has successfully maintained a "no-raise" policy for a few years now at the cost of losing approx. 40% of the department, disproportionately taken from the ranks of the most qualified. They are, of course, now engaged in a massive hiring spree to try to replace those people, often at greater salaries than the departed folk were even asking for in the first place.

It's been kind of fun -- in a dark-humor kind of way -- to watch.

andy weintraub writes:

I don't think I'd call this wage rigidity, since it doesn't reflect the entire market - only an individual employer/employee relationship.
Presumably, there were no higher wage alternatives available to the employee, so he stayed. If they were "prepared to leave" and asked for a higher wage, they presumably were aware of higher wage alternatives in the job market.

Kitty_T writes:

I knew several large law firm counsel (associates who got very senior and were worth keeping around for the long term but not making partner) who actively didn't want raises because it would threaten to upset the balance behind their occasionally cushy deals (they were paid less than even a non-equity partner, but had a certain amount of job security and weren't expected to work 60-80 hours a week since they were no longer gunning for the brass ring).

You also see some upward rigidity in associate salaries in big law firms. Or at least you used to. Not of the sort in your example (in my experience associates know better than to ever, EVER, ask for a raise without another job offer in hand), but in people wanting to opt out of rigid seniority-based salary schedules that imply large increases in hours or skills. A fairly large percentage of associates top out or fall behind in productivity at some point--they take too long to get stuff done right, or what they can do doesn't justify the standard rate for their notional level of seniority. (For the record that is often not their fault - every month spent on document review grunt work can put you a month behind your peers in skill development. Maternity leave is also time lost in practical skill development, but I knew few firms that tolled seniority for maternity leave for fear of appearing non-progressive, even though doing so would have been fairer to everyone involved.) Either the associate's billing rate is suppressed or a lot of their time gets written off, and so getting standard salary increases put them at high risk for becoming ZMP lawyers [insert joke here].

The dot-com boom, when associate salaries at the top end started getting really silly, made it common to lament that the salaries had turned the industry into a meat grider, making associates very vulnerable to downturns and fostering a "we bought you, we own you" attitude in firm management. More enlightened firms started decoupling seniority from midlevel and senior associate salaries long before the bust.

Hana writes:

In the mid-90's, under guidance from a US consulting group based in New England, my parent company at the time implemented for it's Japanese employees a 'negative' review system. The system used a standard 1-5 (5 being the top)overall rating. A 5 entitled an employee to no wage cut, a 4 earned a 10% wage reduction, a 3 resulted in a 15% reduction, a 2 a 25% reduction, and a 1 resulted in a 35% decrease. Official company policy was that 5 was an unreachable goal, therefore no one could possibly earn a 5. Only the very best employees could earn a 4, and the average employee should be between a 2 and a 3.

At the same time the company announced that because of financial circumstances they would forgo the payment of the semi-annual bonuses for Japanese employees and the annual bonus for international employees. While the international employees grumbled and began to send out resumes, the Japanese employees were devastated. The semi-annual bonuses were a critical portion of overall pay in Japan. At the time, for most employees, it represented approximately one-third of their annual take home pay.

As a final affront to the employees, the board announced that because of financial circumstances a special dividend of 5 yen per share was to be paid to stock holders. Not surprisingly, approximately 80% of shares at the time were still held by the founding family. 'Stingy' was the kindest word used for the management.

As for the consulting group, I read their white papers from time to time, but I never pay any attention to ones concerning human resources or employee motivation.

Mr. Econotarian writes:

This happens all the time in hiring. Especially in economically down times, you see resumes of over-qualified people who are just looking for any job, even if it means they take a huge pay cut compared to their last position. You know those folks are going to leave as soon as the economy perks up and they can get a better paying position.

Will writes:

I've changed jobs twice now for asking for a raise. The first time, I had an offer from a headhunter in hand, and asked my current employer to better it, they refused.

The second time, an employee directly under me let slip his salary, which was 20% higher than mine. I told me immediate superior I need to make at least as much as subordinates and was immediately let go.

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