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Testing the Morale Theory of Nominal Wage Rigidity

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  • Daiji Kawaguchi
  • Fumio Ohtake

Abstract

This paper attempts to test the morale theory of nominal wage rigidity by identifying the causal effect of pay cuts on workers' income satisfaction and work morale. This paper uses the current deflationary recession in Japan to estimate this causal effect. 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 effects does not alter the robust relationship between the income cut and demoralization. Overall, our results consistently indicate the adverse effect 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.

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Bibliographic Info

Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0602.

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Date of creation: Apr 2004
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Handle: RePEc:dpr:wpaper:0602

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  1. Alan S. Blinder & Don H. Choi, 1989. "A Shred of Evidence on Theories of Wage Stickiness," NBER Working Papers 3105, National Bureau of Economic Research, Inc.
  2. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 9(1), pages 67-84, January.
  3. Macleod, W.B. & Kanemoto, Y., 1990. "Firm Reputation And Self-Enforcing Labour Contracts," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9026, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  4. Joseph G. Altonji & Paul J. Devereux, 1999. "The Extent and Consequences of Downward Nominal Wage Rigidity," NBER Working Papers 7236, National Bureau of Economic Research, Inc.
  5. Alan Ahearne & Joseph Gagnon & Jane Haltmaier & Steve Kamin ... [et al.]., 2002. "Preventing deflation: lessons from Japan's experience in the 1990s," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 729, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Hiroshi Fujiki & Howard J. Wall, 2006. "Controlling for geographic dispersion when estimating the Japanese Phillips curve," Working Papers, Federal Reserve Bank of St. Louis 2006-057, Federal Reserve Bank of St. Louis.
  2. Smith, Jennifer C, 2013. "Pay Growth, Fairness and Job Satisfaction : Implications for Nominal and Real Wage Rigidity," The Warwick Economics Research Paper Series (TWERPS) 1009, University of Warwick, Department of Economics.
  3. Ana María Iregui & Ligia Alba Melo & María Teresa Ramírez, 2009. "Formación e incrementos de salarios en Colombia: Un estudio microeconómico a partir de una encuesta a nivel de firma," BORRADORES DE ECONOMIA 006286, BANCO DE LA REPÚBLICA.
  4. Abe, Naohito & Yamada, Tomoaki, 2009. "Nonlinear income variance profiles and consumption inequality over the life cycle," Journal of the Japanese and International Economies, Elsevier, vol. 23(3), pages 344-366, September.
  5. Ana María Iregui & Ligia Alba Melo & María Teresa Ramírez, 2010. "Incrementos y rigideces de los salarios en Colombia: Un estudio a partir de una encuesta," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO.
  6. Sasaki, Masaru & Ohtake, Fumio, 2013. "Corporate Sports Activity and Work Morale: Evidence from a Japanese Automobile Maker," IZA Discussion Papers 7836, Institute for the Study of Labor (IZA).
  7. Strawczynski, Michel & Zeira, Joseph, 2009. "Cyclicality of Fiscal Policy: Permanent and Transitory Shocks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7271, C.E.P.R. Discussion Papers.

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