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Why Wages Don’t Fall in Jobs with Incomplete Contracts

Author

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  • Marco Fongoni

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

  • Daniel Schaefer

    (JKU - University of Linz - Johannes Kepler Universität Linz)

  • Carl Singleton

    (UOR - University of Reading)

Abstract

We investigate how the incompleteness of an employment contract—discretionary and noncontractible effort—can affect an employer's decision about cutting nominal wages. Using matched employer-employee payroll data from Great Britain linked to a survey of managers, we find support for the main predictions of a stylized theoretical framework of wage determination: nominal cuts are at most half as likely when managers believe that their employees have significant discretion over how they do their work, although the involvement of employees, via information sharing, reduces this correlation. We also describe how contract incompleteness and wage cuts vary across different jobs. These findings provide the first observational quantitative evidence that managerial beliefs about contractual incompleteness can account for their hesitancy over nominal wage cuts. This has long been conjectured by economists based on anecdotes, qualitative surveys, and laboratory and field experiments.

Suggested Citation

  • Marco Fongoni & Daniel Schaefer & Carl Singleton, 2024. "Why Wages Don’t Fall in Jobs with Incomplete Contracts," Post-Print hal-05069573, HAL.
  • Handle: RePEc:hal:journl:hal-05069573
    DOI: 10.1287/mnsc.2023.02297
    Note: View the original document on HAL open archive server: https://hal.science/hal-05069573v1
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    Keywords

    Wave rigidity; Employment contract; Workplace relations; Employer-employee data; Pay change;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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