Pay Cuts

Jennifer C. Smith ()

No 189, Royal Economic Society Annual Conference 2003 from Royal Economic Society

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.

Keywords: wage rigidity; satisfaction (search for similar items in EconPapers)
JEL-codes: J30 E24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab
Date: 2003-06-04
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