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