Why don’t wages fall during a recession?
That’s the question a lot of economists ask when there’s a downturn. After all, the theory goes, if employers cut wages, their profits would go up they wouldn’t have to fire people. And if workers didn’t like the wage cuts, the recession would make it difficult for them to find a job elsewhere.
A researcher from Yale went out and interviewed over 300 employers, labor leaders, unemployment counselors, and business consultants and asked just this question. The answer: businesses are obsessed with morale. If they cut compensation, workers get discouraged and resentful. And bad morale leads to poor worker productivity. Unhappy workers are not productive workers.
All kinds of schemes have been tried, like cutting wages for new hires, or replacing the entire workforce with a new one at a lower wage scale, but inevitably these schemes fail. Productivity depends on trust, and an employer that takes advantage of its workers when the economy goes south won’t get any extra effort from its workforce.
Culture matters and a healthy culture depends whether people think they’ve been treated fairly. When a company starts cutting nominal wages, watch out.
Douglas R. Tengdin, CFA
Chief Investment Officer