Sticky wages on the layoff margin

Abstract

We design and field an innovative survey of unemployment insurance (UI) recipients that yields new insights about wage stickiness on the layoff margin. Most UI recipients express a willingness to accept wage cuts of 5-10 percent to save their jobs, and one-third would accept a 25 percent cut. Yet worker-employer discussions about cuts in pay, benefits, or hours in lieu of layoffs are exceedingly rare. When asked why employers don’t raise the possibility of job-preserving pay cuts, four-in-ten UI recipients don’t know. Sixteen percent say cuts would undermine morale or lead the best workers to quit, and 39 percent don’t think wage cuts would save their jobs. For those who lost union jobs, 45 percent say contractual restrictions prevent wage cuts. Among those on permanent layoff who reject our hypothetical pay cuts, half say they have better outside options, and 38 percent regard the proposed pay cut as insulting. Our results suggest that wage cuts acceptable to both worker and employer could potentially prevent a quarter of the layoffs in our sample. We draw on our findings and other evidence to assess theories of wage stickiness and its role in layoffs.