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.