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Pay Cuts

Author

Listed:
  • Smith, Jennifer

    (University of Warwick)

Abstract

This paper tests the `morale' theory of downward nominal wage rigidity. This theory relies on workers disliking nominal pay cuts: cuts should make workers less happy. We investigate this using panel data on individual employees' pay and satisfaction. We confirm that nominal cuts do make workers less happy than if their pay had not fallen. But we find no difference in the effect on happiness of cuts and pay freezes. This represents important information about the nature of wage rigidity in practice and the applicability of the morale theory. The morale theory may be able to explain generalised downward wage rigidity, but apparently fails to explain downward nominal rigidity.

Suggested Citation

  • Smith, Jennifer, 2003. "Pay Cuts," Royal Economic Society Annual Conference 2003 189, Royal Economic Society.
  • Handle: RePEc:ecj:ac2003:189
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    More about this item

    Keywords

    wage rigidity; satisfaction;

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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