Testing the Morale Theory of Nominal Wage Rigidity

31 Pages Posted: 1 Jun 2004

See all articles by Daiji Kawaguchi

Daiji Kawaguchi

University of Tokyo - Graduate School of Economics

Fumio Ohtake

Osaka University - Institute of Social and Economic Research

Date Written: April 2004

Abstract

This paper attempts to test the morale theory of nominal wage rigidity by identifying the causal elect of pay cuts on workers' income satisfaction and work morale. This paper uses the current deflationary recession in Japan to estimate this causal elect. Our original survey of Japanese firms and their employees conducted in 2000 revealed that about 17 percent of our sample experienced a nominal, annual income decline. These wage cuts severely decreased income satisfaction and work morale. We consider several channels through which pay cuts deteriorate workers' pay satisfaction and work morale. We found that an income freeze demoralizes workers by reducing workers' trust in their firms, but an income decline decreases work morale even after controlling for this reduction of trust. Allowing for the firm fixed elects does not alter the robust relationship between the income cut and demoralization. Overall, our results consistently indicate the adverse elect of income cuts on workers' pay satisfaction and morale. This evidence, obtained from a deflationary economy, supports Bewley (1999)'s morale theory of nominal wage rigidity.

Keywords: Nominal Wage Rigidity, Work Morale, Deflation

JEL Classification: E31, J30

Suggested Citation

Kawaguchi, Daiji and Ohtake, Fumio, Testing the Morale Theory of Nominal Wage Rigidity (April 2004). Available at SSRN: https://ssrn.com/abstract=550621 or http://dx.doi.org/10.2139/ssrn.550621

Daiji Kawaguchi

University of Tokyo - Graduate School of Economics ( email )

Tokyo
Japan

Fumio Ohtake (Contact Author)

Osaka University - Institute of Social and Economic Research ( email )

1-1 Yamadaoka
Suita
Osaka, 565-0871
Japan

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