Why Wages Don’t Fall in Jobs with Incomplete Contracts

Marco Fongoni (), Daniel Schaefer () and Carl Singleton
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Marco Fongoni: Aix-Marseille Univ, CNRS, AMSE, 13001 Marseille, France
Daniel Schaefer: Department of Economics, Johannes Kepler University Linz, 4040 Linz, Austria

Management Science, 2025, vol. 71, issue 8, 6319-6339

Abstract: We investigate how the incompleteness of an employment contract—discretionary and noncontractible 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 stylized theoretical framework of wage determination: nominal cuts are at most half as likely when managers believe that their employees have significant discretion over how they do their work, although 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: wage rigidity; employment contract; workplace relations; employer-employee data; pay change (search for similar items in EconPapers)
Date: 2025
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http://dx.doi.org/10.1287/mnsc.2023.02297 (application/pdf)

Related works:
Working Paper: Why Wages Don’t Fall in Jobs with Incomplete Contracts (2024)
Working Paper: Why Wages Don't Fall in Jobs with Incomplete Contracts (2024)
Working Paper: Why wages don't fall in jobs with incomplete contracts (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:8:p:6319-6339

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