Why Wages Don't Fall in Jobs with Incomplete Contracts

Marco Fongoni, Daniel Schaefer (daniel.schaefer@jku.at) and Carl Singleton
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Daniel Schaefer: Johannes Kepler University Linz
Authors registered in the RePEc Author Service: Daniel Schäfer

No 17079, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 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.

Keywords: employer-employee data; workplace relations; employment contract; wage rigidity (search for similar items in EconPapers)
JEL-codes: E24 E70 J31 J41 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2024-06
New Economics Papers: this item is included in nep-hrm and nep-lma
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Published - published online in: Management Science , 29 November 2024

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Related works:
Working Paper: When are wages cut? The roles of incomplete contracts and employee involvement (2023)
Working Paper: Why wages don't fall in jobs with incomplete contracts (2023)
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