Sharing the sacrifice, minimizing the pain: Optimal wage reductions

Keaton Miller

Economics Letters, 2020, vol. 196, issue C

Abstract: Faced with temporary revenue shocks, employers may implement wage reductions — a common response to COVID-19 for U.S. universities. I provide a framework for optimal reductions when labor is inelastic wherein a planner balances “minimizing the pain” and “sharing the sacrifice.” I show that for a broad class of utility functions the optimal schedule includes (1) a cutoff wage below which the reduction is zero and (2) weakly progressive reduction rates above the cutoff wage. I illustrate the results using data from a large U.S. university.

Keywords: Optimal taxes; Wage reductions; Equity; Labor; Higher education; COVID-19 (search for similar items in EconPapers)
JEL-codes: D63 G30 H21 I23 J3 L32 M52 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:196:y:2020:i:c:s0165176520303086

DOI: 10.1016/j.econlet.2020.109503

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