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If wages fell during a recession

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  • Buchanan, Joy
  • Houser, Daniel

Abstract

Many economies exhibit downward wage rigidity. Surveys of managers indicate that employers hold wages rigid because they believe morale will suffer after a wage cut. Otherwise, there is little evidence for how employers’ beliefs contribute to wage rigidity and whether those beliefs are accurate. Using an experiment, we demonstrate that effort falls after workers experience a wage cut. Despite this partial confirmation of the Bewley (1999) morale theory, half of the employers in our experiment cut wages and lose money as a result. Under nominal inflation, real wage cuts do not have a significant effect on effort.

Suggested Citation

  • Buchanan, Joy & Houser, Daniel, 2022. "If wages fell during a recession," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1141-1159.
    • Handle: RePEc:eee:jeborg:v:200:y:2022:i:c:p:1141-1159
    DOI: 10.1016/j.jebo.2020.09.023
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    Cited by:

    1. Andrea Guido & Alejandro Martinez-Marquina & Ryan Rholes, 2020. "Information Asymmetry and Beliefs Reveal Self Interest Not Fairness," GREDEG Working Papers 2020-53, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    2. Diriwaechter, Patric & Shvartsman, Elena, 2018. "The anticipation and adaptation effects of intra- and interpersonal wage changes on job satisfaction," Journal of Economic Behavior & Organization, Elsevier, vol. 146(C), pages 116-140.
    3. Feng, Jun & Ho, Chun-Yu & Qin, Xiangdong, 2022. "Internal and external reference dependence of incomplete contracts: Experimental evidences," Journal of Economic Behavior & Organization, Elsevier, vol. 203(C), pages 189-209.
    4. Andrea Guido & Alejandro Martinez-Marquina & Ryan Rholes, 2022. "Reference Dependence and the Role of Information Frictions," GREDEG Working Papers 2022-17, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.

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    More about this item

    Keywords

    Recession; Effort; Experiments; Inflation;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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