If Wages Fell During a Recession

28 Pages Posted: 7 Aug 2019

See all articles by Joy Buchanan

Joy Buchanan

Samford University

Daniel Houser

George Mason University - Department of Economics; Interdisciplinary Center for Economic Science

Date Written: August 6, 2019


Many economies exhibit downward wage rigidity. Surveys of managers indicate that employers hold wages rigid because they believe morale will suffer after a wage cut. Otherwise, there is little evidence for how employers' beliefs contribute to wage rigidity and whether those beliefs are accurate. Our design allows us to compare beliefs and effort rigorously. We demonstrate that effort falls after workers experience a wage cut and also that workers form reference points from wage contracts. Despite this partial confirmation of the morale theory as an explanation for wage rigidity, half of the employers in our experiment cut wages and lose money as a result. In a treatment where a recession is offset by nominal inflation, real wage cuts do not have a significant effect on effort.

Keywords: wage rigidity

JEL Classification: C91 , D84

Suggested Citation

Buchanan, Joy and Houser, Daniel, If Wages Fell During a Recession (August 6, 2019). GMU Working Paper in Economics No. 2019-02. Available at SSRN: https://ssrn.com/abstract=3433097 or http://dx.doi.org/10.2139/ssrn.3433097

Joy Buchanan (Contact Author)

Samford University ( email )

800 Lakeshore Drive
Birmingham, AL 35229
United States

Daniel Houser

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

Interdisciplinary Center for Economic Science ( email )

5th Floor, Vernon Smith Hall
George Mason University
Arlington, VA 22201
United States
7039934856 (Phone)

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