Caplan Nails It on Pay Cuts
By David Henderson
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.
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.