Why wages don't fall in jobs with incomplete contracts

Marco Fongoni, Daniel Schaefer (daniel.schaefer@jku.at) and Carl Singleton
Additional contact information
Daniel Schaefer: Institut für Volkswirtschaftslehre, Johannes-Kepler-Universität Linz

No em-dp2023-12, Economics Discussion Papers from Department of Economics, University of Reading

Abstract: We investigate how the incompleteness of an employment contract - discretionary and non-contractible 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 stylised theoretical framework of wage determination: nominal cuts are at most half as likely when managers believe their employees have significant discretion over how they do their work, though involvement of employees in workplace decision-making reduces this correlation. We also describe how contract incompleteness and wage cuts tend to vary across different jobs. These findings provide the first quantitative evidence of the notion 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 lab experiments.

Keywords: Wage rigidity; Employment contract; Workplace relations; Employer-employee data (search for similar items in EconPapers)
JEL-codes: E24 E70 J31 J41 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2023-08-02
New Economics Papers: this item is included in nep-eur, nep-hrm and nep-lma
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https://research.reading.ac.uk/economics/wp-conten ... 23/08/emdp202312.pdf

Related works:
Working Paper: Why Wages Don't Fall in Jobs with Incomplete Contracts (2024)
Working Paper: When are wages cut? The roles of incomplete contracts and employee involvement (2023)
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