Why Wages Don't Fall During a Recession

A deep question in economics is why wages and salaries don't fall during recessions. this is not true of other prices, which adjust relatively quickly to reflect changes in demand and supply. Although economists have posited many theories to account for wage rigidity, none is satisfactory. eschewing "top-down" theorizing, the author explored the puzzle by interviewing - during the recession of the early 1990s - over 300 business executives and labour leaders as well as professional recruiters and advisors to the unemployed. By taking this approach, gaining the confidence of his interlocutors and asking them detailed questions in a nonstructured way, he was able to uncover empirically the circumstances that give rise to wage rigidity. He found that the executives were averse to cutting wages of either current employees or new hires, even during the economic downturn when demand for their products fell sharply. They believed that cutting wages would hurt morale, which they felt was critical in gaining the cooperation of their employees, and in convincing them to internalize the managers' objectives for the company. Bewley's findings contradict most theories of wage rigidity and provide fascinating insights into the problems businesses face that prevent labour markets from clearing.

ISBN 0674952413   Pages 538 ISBN13 9780674952416 (What's this?)   Volumes 001 Publisher Harvard University Press   Weight (grammes) 960 Imprint Harvard University Press   Published in Cambridge, Mass Format Hardback   Height (mm) 235 Publication date 03 Feb 2000   Width (mm) 161 Library of Congress HD4909.B48   Spine width (mm) 43 DEWEY 331.215   Academic level Undergraduate, Postgraduate, Professional / Scholarly DEWEY edition DC21

		Acknowledgments
1		Introduction		1
2		Methods		20
3		Time and Location		38
4		Morale		41
5		Company Risk Aversion		57
6		Internal Pay Structure		70
7		External Pay Structure		86
8		The Shirking Theory		110
9		The Pay of New Hires in the Primary Sector		131
10		Raises		153
11		Resistance to Pay Reduction		170
12		Experiences with Pay Reduction		199
13		Layoffs		218
14		Severance Benefits		263
15		Hiring		277
16		Voluntary Turnover		303
17		The Secondary Sector		309
18		The Unemployed		329
19		Information, Wage Rigidity, and Labor Negotiations		377
20		Existing Theories		398
21		Remarks on Theory		430
22		Whereto from Here?		464
		Notes		471
		References		477
		Index		525

This contribution to the growing literature on behavioral macroeconomics threatens to disturb the tranquil state of macroeconomic theory that has prevailed in recent years...Bewley's argument will be hard for conventional macroeconomists to ignore, partly because of the extraordinary thoroughness and honesty with which he evidently conducted his investigation, and the sheer volume of evidence he provides...Although Bewley's work will not settle the substantive debates related to wage rigidity, it is likely to have a profound influence on the way macroeconomists construct models. In particular, the concepts of morale, fairness, and money illusion are almost certain to play a big role in macroeconomic theory. His demonstration that there exist in reality simple, robust behavioral patters that cannot plausibly be founded on traditional maximizing behabior also raises the prospect of a more empirically oriented, more behavioral macroeconomics in the future. -- Peter Howitt "journal of Economic Literature"

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