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Testing the Morale Theory of Nominal Wage Rigidity

  • Daiji Kawaguchi
  • Fumio Ohtake

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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File URL: http://www.iser.osaka-u.ac.jp/library/dp/2004/DP0602.pdf
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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. 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.).
  3. 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.
  4. Macleod, W.B. & Kanemoto, Y., 1990. "Firm Reputation and Self-Enforcing Labour Contracts," Cahiers de recherche 9026, Universite de Montreal, Departement de sciences economiques.
  5. 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.
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