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Sharing the sacrifice, minimizing the pain: Optimal wage reductions

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  • Miller, Keaton

Abstract

Faced with temporary revenue shocks, employers may implement wage reductions — a common response to COVID-19 for U.S. universities. I provide a framework for optimal reductions when labor is inelastic wherein a planner balances “minimizing the pain” and “sharing the sacrifice.” I show that for a broad class of utility functions the optimal schedule includes (1) a cutoff wage below which the reduction is zero and (2) weakly progressive reduction rates above the cutoff wage. I illustrate the results using data from a large U.S. university.

Suggested Citation

  • Miller, Keaton, 2020. "Sharing the sacrifice, minimizing the pain: Optimal wage reductions," Economics Letters, Elsevier, vol. 196(C).
    • Handle: RePEc:eee:ecolet:v:196:y:2020:i:c:s0165176520303086
    DOI: 10.1016/j.econlet.2020.109503
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    References listed on IDEAS

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    Cited by:

    1. Mukhtar A. Kassem & Afiqah R. Radzi & Asankha Pradeep & Mohammed Algahtany & Rahimi A. Rahman, 2023. "Impacts and Response Strategies of the COVID-19 Pandemic on the Construction Industry Using Structural Equation Modeling," Sustainability, MDPI, vol. 15(3), pages 1-24, February.
    2. Luciana C. Fiorini & Wilfredo L. Maldonado, 2022. "Labor Supply in Pandemics Environments: An Aggregative Games Approach," Working Papers, Department of Economics 2022_18, University of São Paulo (FEA-USP).
    3. Afiqah R. Radzi & Rahimi A. Rahman & Saud Almutairi, 2022. "Modeling COVID-19 Impacts and Response Strategies in the Construction Industry: PLS–SEM Approach," IJERPH, MDPI, vol. 19(9), pages 1-25, April.

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    More about this item

    Keywords

    Optimal taxes; Wage reductions; Equity; Labor; Higher education; COVID-19;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions

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