The Wages of Pay Cuts: Evidence from a Field Experiment
Daniel L. Chen
ETH Zurich - Center for Law and Economics
John J. Horton
New York University (NYU) - Department of Information, Operations, and Management Sciences
April 2, 2009
We conduct a field experiment to understand why firms rarely cut nominal wages, a central tenet of macroeconomics, and poorly understood due to the difficulty of observing plausibly exogenous wage reductions in actual labor market settings. We hired workers for a data entry task, paid them a high wage and then offered some of the workers the opportunity to keep working, albeit for a lower wage. Offers were framed differently across groups. Workers were more likely to reject lower offers, but 'reasonable' justifications eliminated this effect. Yet not all justifications were effective - suggesting the cut would improve our profits increased quits. We also measured whether the treatments affected quality, trust and cooperation. The 'profits' treatment reduced cooperation and possibly reduced quality; the other treatments had generally weak effects. Our auxiliary results are more consistent with theories of negative reciprocity, where firms are reluctant to reduce wages for fear of worker retaliation, than with theories of gift exchange or adverse selection. In a follow-up experiment, we measure the value of different framings for wage cuts.
Number of Pages in PDF File: 31
Date posted: August 7, 2009
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