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

Marco Fongoni, Daniel Schaefer () and Carl Singleton
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Daniel Schaefer: Institut für Volkswirtschaftslehre, Johannes-Kepler-Universität Linz
Authors registered in the RePEc Author Service: Daniel Schäfer

No em-dp2023-03, Economics Discussion Papers from Department of Economics, 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.

Keywords: Wage rigidity; Reciprocity; Workplace relations; Employer-employee data (search for similar items in EconPapers)
JEL-codes: E24 E70 J31 J41 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2023-01-30
New Economics Papers: this item is included in nep-eur, nep-hrm and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: When are wages cut? The roles of incomplete contracts and employee involvement (2023)
Working Paper: When are wages cut? The roles of incomplete contracts and employee involvement (2023)
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