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Testing the Morale Theory of Nominal Wage Rigidity

  • Daiji Kawaguchi
  • Fumio Ohtake

This paper tests the morale theory of nominal wage rigidity, according to which firms resist making nominal cuts to workers’ pay even in adverse economic conditions because such cuts hurt worker morale and productivity. The authors analyze data from an employer-employee survey they conducted in Japan in 2000. That year coincided with a rare spell of deflationary recession, which, the authors argue, is a good setting in which to study how nominal pay cuts affect morale. They find that a nominal annual pay freeze, experienced by 21% of the sampled workers, demoralized workers by reducing their trust in the firm, and that even greater demoralization—not wholly attributable to reduced trust—was associated with a nominal pay cut, which affected 17% of the workers. The observed negative relationship between nominal pay cuts and morale persists even when the estimation includes controls and firm fixed effects.

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Article provided by ILR Review, Cornell University, ILR School in its journal ILR Review.

Volume (Year): 61 (2007)
Issue (Month): 1 (October)
Pages: 59-74

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Handle: RePEc:ilr:articl:v:61:y:2007:i:1:p:59-74
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  1. 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 729, Board of Governors of the Federal Reserve System (U.S.).
  2. Macleod, W.B. & Kanemoto, Y., 1990. "Firm Reputation and Self-Enforcing Labour Contracts," Cahiers de recherche 9026, Universite de Montreal, Departement de sciences economiques.
  3. 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.
  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. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 67-84, January.
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