Just over 5 weeks ago, co-blogger Bryan Caplan wrote:
Why then are nominal pay cuts suddenly on the table? You could say, “Workers have suddenly become more logical,” but as far as I can tell, they’re crazier than ever. But psychologically speaking, there is one radical and unprecedented change in the emotional experience of labor in the time of coronavirus: the explosion of telework. Until recently, only 3% of workers teleworked, and a large majority of these teleworkers probably dropped by the office at least every week or two. Now the telework share has plausibly multiplied tenfold, and our former offices are all but abandoned.
Loneliness is only the most obvious psychological effect. Teleworkers have also lost most of their opportunities to complain and hear complaints, to feel bitterness and sow bitterness, to feel aggrieved and seek revenge. As a result, I speculate, the effect of nominal wage cuts on morale has never been lower.
When an employer cuts the pay of a face-to-face work team, the workers constantly remind each other of the perceived affront. They work down the hall from the executive they hold responsible for the pay cuts. They see which fellow workers are standing up for themselves, and who’s kowtowing to The Man. That’s how the classic mechanism – wage cuts –> bad morale –> low productivity –> reduced profits – worked. Now, in contrast, teleworkers are stuck at home with their families. They’re juggling childcare, housework, and safety in a chaotic situation. As a result, they have neither the energy nor the forum to kvetch – verbally or otherwise – with coworkers. Today’s teleworkers talk to their peers to get the job done, then get back to business. Supervisors who cut your pay now feel more like a tiresome video than a human villain, which quells the urge to settle the score.
The New York Times recently provided more evidence. In “Pay Cuts Become a Tool for Some Companies to Avoid Layoffs,” May 24, Nelson D. Schwartz writes:
It was late and Martin A. Kits van Heyningen feared he was letting the team down at the company he co-founded, KVH Industries. Rather than lay off workers in response to the coronavirus pandemic, he had decided to cut salaries, and when he emailed a video explaining his decision at 3 a.m. last month, he was prepared for a barrage of complaints.
Instead, he woke to an outpouring of support from employees that left him elated.
“It was one of the hardest things I’ve done, but it turned out to be the best day of my life at work,” said Mr. Kits van Heyningen. “I was trying to keep their morale up. Instead, they kept my morale up.”
Even as American employers let tens of millions of workers go, some companies are choosing a different path. By instituting across-the-board salary reductions, especially at senior levels, they have avoided layoffs.
Schwartz goes on to point out that the biggest percentage cuts were on pay for the top-paid people in the firm, but still, a large percent of workers had their pay cut.
One nugget:
Mr. Case said he was heartened because overseas employees, who had the right to reject the salary cuts, overwhelmingly accepted them. About two-thirds of Aon’s work force is outside the United States.
HT2 Tyler Cowen.
READER COMMENTS
Dylan
May 28 2020 at 9:20pm
I’ve pointed this out on a couple of other posts on this topic already, but this idea that pay cuts have been exceedingly rare isn’t born out by the evidence. Recent studies that look at payroll data and other granular measures show a fairly large number (as high as 15-25%) of workers having nominal pay decreases in any year to year comparisons. That’s over long periods of time that include both boom times and recessions.
Sure, we’re seeing a lot of nominal pay cuts right now, but we also saw a fair amount over the last recession.
There’s a link to one of the papers in my comment on Brian’s post. And if you go back to Scott’s post on the topic a couple of weeks before that, you’ll find links to a few more.
john hare
May 29 2020 at 4:27am
From personal observation, I am thinking that very few of the nominal pay cuts in normal times are from people staying in the same position in the same company. The owners I know, including myself, would rather turn some people loose than cut wages for ones that stay. For every understanding employee that will work with you during trying times, there are probably several that will work against you after a pay cut for any reason. This is personal observation with no links to academic studies.
Dylan
May 29 2020 at 6:20am
John,
That’s exactly the story that economists have told, and it makes sense! I’d heard of fairly wide spread pay cuts during the 2008 recession, and more stories about these over the last couple of months with VC backed startups that I’ve been working with.But I figured these would be limited to extreme downturns where the alternative was firing a bunch of people vs. shared (and hopefully temporary) wage cuts across the board.
Scott posted on this back in March, and I originally looked at the research because I wanted to see if the wage stickiness story was changing over time with a less unionized workforce, more gig work, etc…
The studies I found were pretty shocking, because they were showing something in the neighborhood of 20% year over year nominal pay cuts among people that stayed at the same job! They’ve even done a subset analysis to look at people whose hours looked to stay constant around 4o, and found:
I’ve linked to a few other papers in the comments to Scott’s original post that look at the data we have from many different regions of the world, and they all seem to be in the same general ballpark of significant numbers of job stayers seeing nominal pay reductions year over year, even in good times. The exceptions are in parts of the world that are undergoing high inflation, and where minimum wage laws prevent reductions in the nominal hourly wage.
David Henderson
May 29 2020 at 9:52am
Wow! Thanks, Dylan. I had no idea how widespread this was. Vigdor is a first-rate economist.
Dylan
May 29 2020 at 10:31am
You’re welcome. I was just as surprised as you when I started to look through the literature.I actually started a correspondence with Gary Solon, one of the co-authors of that paper, because I didn’t have access to the full paper, and wanted to make sure I was understanding the implications correctly.
And I agree on Vigdor, his EconTalk on the Seattle Minimum Wage law is one of my top episodes.
Vivian Darkbloom
May 29 2020 at 10:22am
I would bet that the vast majority of nominal wage cuts as measured by these studies are due to decreases in incentive compensation and not decreases in hourly wages or monthly salaries, per se. The majority of US employees qualify for incentive compensation of some sort (various types of bonuses, stock options, etc). One of the reasons employers like incentive compensation is that it allows them to not pay any in times of economic difficulty. Because incentive compensation has become more prevalent in the past few decades, it is likely that (average) wages have become less “sticky” because employers have more flexibility.
Dylan
May 29 2020 at 10:43am
I think this is right. My recollection is the data sources didn’t really allow for that kind of breakdown, but it certainly makes sense and is a lot more believable than 20% of workers having their fixed salary decreased in any year.
Still interesting how prevalent incentive pay is and how much it fluctuates. As for becoming more common in the last few decades, that was my hypothesis as well, but not sure the data support that, or at least depending on what you count as the last few decades. I think the longest running data set they had went from the early 80s to post the Great Recession and didn’t show a major trend in one direction or the other, but I’d have to reread the studies to make sure I’m recalling correctly.
eric mcfadden
May 29 2020 at 5:12am
Hello,
I have a personal anecdote that might apply. I teach English in Japan in a junior high school. The school closed on the last day of January. After two weeks it was decided to teach lessons via Zoom.
I hate zoom lessons but for a week I taught them, then I told the principle that this sucks and i’ll see you when it’s over. I have some bargaining power because I’m the English teacher and the principle has a lot of things to worry about. Two days ago Japan decided to start everything up again. The plan is to start school in 3 days. The rule is that teachers will have to wear masks and the classrooms will be half empty.
I’m anti mask, have been this entire time. I told the principle that I will not teach with a mask. Of course I am the insane American in this situation and there is a massive barrier because of the subtlety.
Wearing extra masks would be an extra burden like wearing goggles or working in a hot room. Normally if I was in an office I could complain about a burden, but in this distanced world I cannot.
Suddenly the principle has to faceme, his English teacher, in the teacher’s room. The other teachers are Japanese and I have no idea what they want or think in any detail. But the principle caved in because he has no other choice and is being forced to suddenly open up his school in 5 days with no plan. His staff of 200 teachers and jackass(me). The tenative plan is for me to carry and acrylic shield to put on the podium in front of the classroom while I lecture. I expected to be fired but they are in a fix and basically have to just deal with me. It’s not a change in salary but in a normal situation I think the complaint dynamics would be different.
The changes in actual salary being offered and accepted are interesting but I doubt they are going to stick around. Look how the sports players unions are delaying decisions until they get the best possible offer. Cool insight by Mr. Caplan.
Alan Goldhammer
May 29 2020 at 9:13am
“I’m anti mask, have been this entire time. I told the principle that I will not teach with a mask. Of course I am the insane American in this situation and there is a massive barrier because of the subtlety.”
This is such an appalling statement and goes against the simplest public health measure that one can take. “Finally, nationally mandating face masks for employees on April 1st would have reduced the case growth rate by 0.1-0.25. This leads to 30% to 57% fewer reported cases by late May, which translates into, roughly, 30-57 thousand saved lives.” this is from: https://www.medrxiv.org/content/10.1101/2020.05.27.20115139v1
It’s almost as bad a statement as the new White House guidelines on reopening that removed the statement about choir practice causing increased risk of viral infection when we have affirmative knowledge that this is the case.
TMC
May 29 2020 at 12:50pm
Well, the WHO and the CDC are now saying masks, for the healthy, need to only be worn by those treating sick people, so this doesn’t sound so bad. I’d agree with Eric that he does sound like he’s being a jacka** about it.
Charles Lindsey
Jun 4 2020 at 2:57pm
I’m not intimately familiar with Japan, but isn’t it considered important to show respect for your superiors, your co-workers, and your students? It’s not a stretch to perceive the non-mask-wearing, defiant, “you need me more than I need you” employee as being deliberately offensive. How did that go down?
Also, Mr. Teacher, it’s “principal.”
Thomas Hutcheson
May 29 2020 at 8:18am
Everybody has anecdotes. Mine is of a firm in 2008 in which the employees wanted pay cu s rather than job cuts but the firms refused because (they said) job cuts looked better to investors. Maybe investor sentiment has changed.
And while renegotiating wage contracts makes sense, why do we not hear more about renegotiating rental and mortgage contracts? In general why do we have “sticky wages” models ant nor sticky prices model?
Matthias Görgens
May 30 2020 at 11:01pm
See https://en.m.wikipedia.org/wiki/Mortgage_modification
Mortgagecontracts are being negotiated all the time.
Rental contracts are sometimes renegotiated as well. But I guess people might also just move?
Thomas Sewell
May 30 2020 at 1:29am
On the flip side, a lot of us got an effective temporary pay raise by now working from home. Say, 40 minutes of less commute time to work each day, but the same money in our bank accounts from the company.
Thomas Hutcheson
May 30 2020 at 2:32pm
It will be interesting to see how much hysteresis there is in tele-working, tele-medicine, on-line shopping/delivery.
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