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When are wages cut? The roles of incomplete contracts and employee involvement

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 develop a model of incomplete employment contracts such that employees have some discretion over effort, which depends on their work morale. Nominal wage cuts have a strong negative effect on morale, while employee involvement in workplace decision-making tends to increase morale. We derive predictions on how these two mechanisms affect the decisions of firms to cut nominal wages. Using matched employer-employee and manager survey data from Great Britain, we find support for our model: nominal wage cuts are only half as likely when managers think that employees have some discretion over how they perform their work, but this reduced likelihood recovers partially when employees are involved in the decision-making process at their workplace.

Suggested Citation

  • Marco Fongoni & Daniel Schaefer & Carl Singleton, 2023. "When are wages cut? The roles of incomplete contracts and employee involvement," Working Papers hal-03953201, HAL.
  • Handle: RePEc:hal:wpaper:hal-03953201
    Note: View the original document on HAL open archive server: https://amu.hal.science/hal-03953201
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    References listed on IDEAS

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    More about this item

    Keywords

    Employer-employee data; Wage rigidity; Reciprocity; Workplace relations;
    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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