Workforce Cuts vs. Wage Cuts

As part of the excellent Lectures on Macroeconomics series, Arnold Kling discusses why companies tend to cuts jobs rather than wages in times of hardship. The core arguments:

Cutting wages is not standard practice, therefore:

  • The best workers will leave and seek better opportunities: it’s better to choose which workers to lose.
  • Wage cuts demoralise, harming productivity.

However, there are rare circumstances that call for wage cuts:

  • There is general deflation. Cuts will “keep wages from rising relative to prices and productivity”.
  • A major sectoral decline requires it, in order to help maintain employment.

It’s interesting to note that, according to a recent survey, the primary concern for 69% of American workers is keeping their job, yet only 17% would be willing to take a pay cut to keep their job.