Why Wages Don't Fall during a Recession

Why Wages Don't Fall during a Recession
Author: Truman F. BEWLEY
Publisher: Harvard University Press
Total Pages: 538
Release: 2009-06-30
Genre: Business & Economics
ISBN: 0674020901

A deep question in economics is why wages and salaries don't fall during recessions. This is not true of other prices, which adjust relatively quickly to reflect changes in demand and supply. Although economists have posited many theories to account for wage rigidity, none is satisfactory. Eschewing "top-down" theorizing, Truman Bewley explored the puzzle by interviewing--during the recession of the early 1990s--over three hundred business executives and labor leaders as well as professional recruiters and advisors to the unemployed. By taking this approach, gaining the confidence of his interlocutors and asking them detailed questions in a nonstructured way, he was able to uncover empirically the circumstances that give rise to wage rigidity. He found that the executives were averse to cutting wages of either current employees or new hires, even during the economic downturn when demand for their products fell sharply. They believed that cutting wages would hurt morale, which they felt was critical in gaining the cooperation of their employees and in convincing them to internalize the managers' objectives for the company. Bewley's findings contradict most theories of wage rigidity and provide fascinating insights into the problems businesses face that prevent labor markets from clearing. Table of Contents: Acknowledgments 1. Introduction 2. Methods 3. Time and Location 4. Morale 5. Company Risk Aversion 6. Internal Pay Structure 7. External Pay Structure 8. The Shirking Theory 9. The Pay of New Hires in the Primary Sector 10. Raises 11. Resistance to Pay Reduction 12. Experiences with Pay Reduction 13. Layoffs 14. Severance Benefits 15. Hiring 16. Voluntary Turnover 17. The Secondary Sector 18. The Unemployed 19. Information, Wage Rigidity, and Labor Negotiations 20. Existing Theories 21. Remarks on Theory 22. Whereto from Here? Notes References Index Reviews of this book: In Why Wages Don't Fall During A Recession, [Truman Bewley] tackles one of the oldest, and most controversial, puzzles in economics: why nominal wages rarely fall (and real wages do not fall enough) when unemployment is high. But he does so in a novel way, through interviews with over 300 businessmen, union leaders, job recruiters and unemployment counsellors in the north-eastern United States during the early 1990s recession...Mr. Bewley concludes that employers resist pay cuts largely because the savings from lower wages are usually outweighed by the cost of denting workers' morale: pay cuts hit workers' standard of living and lower their self-esteem. Falling morale raises staff turnover and reduces productivity...Mr. Bewley's theory has some interesting implications...[and] has a ring of truth to it. --The Economist Reviews of this book: This contribution to the growing literature on behavioral macroeconomics threatens to disturb the tranquil state of macroeconomic theory that has prevailed in recent years...Bewley's argument will be hard for conventional macroeconomists to ignore, partly because of the extraordinary thoroughness and honesty with which he evidently conducted his investigation, and the sheer volume of evidence he provides...Although Bewley's work will not settle the substantive debates related to wage rigidity, it is likely to have a profound influence on the way macroeconomists construct models. In particular, the concepts of morale, fairness, and money illusion are almost certain to play a big role in macroeconomic theory. His demonstration that there exist in reality simple, robust behavioral patters that cannot plausibly be founded on traditional maximizing behabior also raises the prospect of a more empirically oriented, more behavioral macroeconomics in the future. --Peter Howitt, journal of Economic Literature Reviews of this book: I think any scholar interested in labour markets and wage determination should read this well-written, lively, and highly stimulating book...[It] provides a fresh view and a lot of complementary background knowledge about how experienced people in the field see the employment relationship and what is actually crucial. Knowledge of this sort is all too rare in economics, and Truman Bewley's truly impressive study can serve as a role model for future investigations. --Simon G'chter, Journal of Institutional and Theoretical Economics To call this book a breath of fresh air is an understatement. The direct insights are fascinating, and Truman Bewley's use of them is sharp and insightful. Labor economists and macroeconomists have a lot to think about. --Robert M. Solow, Nobel Laureate, Institute Professor of Economics, Emeritus, Massachusetts Institute of Technology Truman Bewley set out to conduct a handful of interviews with business executives to gain some theoretical inspiration, and his project blossomed into over 300 interviews with business people, labor leaders and consultants. He is truly the accidental interviewer of economics. Time and again, he found that workers behave like people, not atomistic, selfish economic agents. His insights will engage and enrage economic theorists and empiricists for years to come. --Alan Krueger, Bendheim Professor of Economics and Public Affairs, Princeton University

Theories of Wage Rigidity

Theories of Wage Rigidity
Author: Joseph E. Stiglitz
Publisher:
Total Pages: 0
Release: 2001
Genre:
ISBN:

This paper considers two sets of theories attempting to explain wage rigidities and unemployment: implicit contract theory and the efficiency wage theory. The basic thesis of the paper is that the former set of theories do not provide a convincing explanation of the kind of wage rigidity which is associated with cyclical unemployment,while the latter theories do. Several of the more recent versions of implicit contract theory are considered: implicit contracts with asymmetric information may give rise to over employment rather than underemployment, and the forms of contracts to be expected, were asymmetric information considerations paramount, are not observed.Other versions of the asymmetric information implicit contract model, explicitly long term in nature, may give rise to full employment. One version of implicit contract theory which does give rise to lay-offs arises when search is costly and cannot be monitored. But even this extension does not explain certain important features of observed patterns of unemployment. In contrast, the efficiency wage models not only provide an explanation of the existence of unemployment equilibrium in competitive economies, but they also provide part of the explanation of the observed patterns of unemployment. They also explain why different firms may pay similar workers different wages, why wages may be sticky, why firms maynot loose much if they fail to adjust their wages, and why, when they adjust their wages optimally, they adjust them slowly.The policy implications of the efficiency wage model are markedly different from those of models in which wages are absolutely rigid aswell as from those in which unemployment arises from asymmetric information.

Efficiency Wages

Efficiency Wages
Author: Andrew Weiss
Publisher: Princeton University Press
Total Pages: 126
Release: 2014-07-14
Genre: Political Science
ISBN: 140086206X

Known for his seminal work in efficiency-wage theory, Andrew Weiss surveys recent research in the field and presents new results. He shows how wage schedules affect the kinds of workers a firm employs and how well those workers perform on the job. Using straightforward examples, he demonstrates how efficiency-wage theory can explain labor market outcomes and guide government policy. There is a separate section of applications to less developed countries. "Efficiency-wage models represent one of the most important developments in economic theory of recent years. They have, at last, provided integrated explanations both of macroeconomic phenomena, such as unemployment and wage rigidity, and microeconomic phenomena, such as wage dispersion. Weiss--one of the pioneers of efficiency-wage theory--provides here a masterful survey, a lucid and systematic and yet critical account of this rapidly developing branch of economics. This book should be required reading in all courses in macroeconomics."--Joseph Stiglitz, Stanford University "Efficiency Wages should be on the bookshelf of all labor and macroeconomists."--Lawrence H. Summers, Harvard University "A splendid monograph ... most readable... I will put it on my reading list."--Partha Dasgupta, Stanford University Originally published in 1991. The Princeton Legacy Library uses the latest print-on-demand technology to again make available previously out-of-print books from the distinguished backlist of Princeton University Press. These editions preserve the original texts of these important books while presenting them in durable paperback and hardcover editions. The goal of the Princeton Legacy Library is to vastly increase access to the rich scholarly heritage found in the thousands of books published by Princeton University Press since its founding in 1905.

Involuntary Unemployment

Involuntary Unemployment
Author: Michel de Vroey
Publisher: Psychology Press
Total Pages: 315
Release: 2004
Genre: Employment (Economic theory)
ISBN: 0415407109

This book tackles the issue of involuntary employment, examining the issue in the light of Keynesian and Post-Keynesian theory.

Handbook of Labor Economics

Handbook of Labor Economics
Author: Orley Ashenfelter
Publisher: Elsevier
Total Pages: 800
Release: 1999-11-18
Genre: Business & Economics
ISBN: 9780444501899

A guide to the continually evolving field of labour economics.

Unemployment

Unemployment
Author: Richard Layard
Publisher: Oxford University Press, USA
Total Pages: 678
Release: 2005
Genre: Business & Economics
ISBN: 9780199279173

This broad survey of unemployment will be a major source of reference for both scholars and students.

Efficiency Wage Models of the Labor Market

Efficiency Wage Models of the Labor Market
Author: George A. Akerlof
Publisher: Cambridge University Press
Total Pages: 196
Release: 1986-11-28
Genre: Business & Economics
ISBN: 9780521312844

The contributors explore the reasons why involuntary unemployment happens when supply equals demand.

Allocation, Information and Markets

Allocation, Information and Markets
Author: John Eatwell
Publisher: Springer
Total Pages: 321
Release: 1989-09-21
Genre: Business & Economics
ISBN: 1349202150

This is an extract from the 4-volume dictionary of economics, a reference book which aims to define the subject of economics today. 1300 subject entries in the complete work cover the broad themes of economic theory. This volume concentrates on the topic of allocation information and markets.