Wage Smoothing as a Signal of Quality

Ronald M. Giammarino and Ed Nosal

Canadian Journal of Economics, 1990, vol. 23, issue 1, 159-74

Abstract: The authors provide an explanation for firms smoothing wages over the business cycle that is based on asymmetric information about the quality of a firm's management team and does not depend upon the workers being risk averse. When firms pay their workers the full information profit maximizing wage, higher quality firms will attract more workers and earn greater profits than lower quality firms. This provides a rationale for wage smoothing when quality is not observable to workers: lower quality firms will resist cutting wages to the full information level in an economic downturn in an attempt to convince workers that they are of higher quality.

Date: 1990
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