The Economic Perspective: “Do Employers Ever Cut Wages?”

I’m Mary Walden, with economist MW, welcoming you to the economic perspective.   Today’s program asks if employers ever cut wages.  Mike, for almost eight decades it has been a common belief among economists that it is hard for employers to cut a worker’s wage rate.  Employers might fire workers, or they might reduce their work hours, but directly reducing a worker’s pay per hour was rarely done, and only as a last resort.   Now I understand there is some new research that goes against this assumption.  Please explain.

Mike:  Summary Answer

  1. One reason the assumption has not been challenged it that it has been difficult to obtain sufficient data to examine it
  2. Now some researchers have sufficient data from Washington State over a ten year period
  3. Their discovery – in any year, about 20% of workers have their wage rate cut
  4. Importantly – this is the observable wage rate – not the wage adjusted for inflation
  5. the 20% cut is consistent across industries and firm sizes, and rises during recessions
  6. impact of this finding is significant for public policy
  7. rationale for “stimulus plans” is based in part on “sticky wages”
  8. I’m MW

Mary:  And I’m Mary Walden for the Economic Perspective, an NC State Extension program from the Department of Agricultural and Resource Economics.