Posner's Primer on Wage Rigidity
Unfortunately, not all prices are flexible; wages especially are not.
This is not primarily because of union or other employment contracts.
Few private-sector employers in the United States are unionized and as
a result few workers (other than federal judges!) have a guaranteed
wage. The reasons that employers generally prefer to lay off workers
than to reduce wages when demand drops are first that by picking the
least productive workers to lay off an employer can increase the
productivity of its work force; second that workers may respond to a
reduction in their wages by working less hard, and, conversely, may
work harder if they think that by doing so they are reducing the
likelihood of their being laid off; and third that when all workers in
a plant or office have their wages cut, all are unhappy, whereas with
lay offs the unhappy workers are off the premises and so do not incite
unhappiness among the ones who remain.
Perhaps strangely, this reminds me of Rothbard at his best:
Generally, wage rates can only be kept above full-employment
rates through coercion by governments, unions, or both. Occasionally,
however, the wage rates are maintained by voluntary choice (although
the choice is usually ignorant of the consequences) or by coercion
supplemented by voluntary choice. It may happen, for example,
that either business firms or the workers themselves may become
persuaded that maintaining wage rates artificially high is their
bounden duty. Such persuasion has actually been at the root of
much of the unemployment of our time, and this was particularly
true in the 1929 depression.
I have a dream that one day workers will see employers who cut wages during downturns as people with “hard heads and soft hearts.” What will it take to bring my dream to life?