Why do firms adjust by cutting workers rather than by cutting wages? | Hacker News Reader

Why do firms adjust by cutting workers rather than by cutting wages?

econlog.econlib.org

2 pointsdangoldin5 comments

I worked at a company, back in the mid-90s, that wasn't doing so well (I found out later because of really bad decisions by the owner) and cut everyone's pay by 20%. Full-time employees took a 20% cut and part-time employees could only work 4 days a week. At the time, this seriously hurt the goodwill that we, as employees, had for the company.

One concern was that if we could continue to live on the reduced income and were happy to do so, there was no reason to restore the salaries if the company ever turned around. So anyone who stuck around at the reduced rate was only delaying their leaving the company eventually anyway. All this did was keep people from being forced to find new jobs sooner.

Another concern was that _everyone_, the employees known to be valuable _and_ the dead weight, were potentially paying to keep the dead weight around. The ability to do cut-backs gives you a bonafide excuse to get rid of the dead weight, cut the fat, and operate leanly. One way to do that is by giving your top performers more responsibility and showing them they are valuable; the good people will step up to the challenge. By keeping under-performers around, it sends the message that the company actually isn't interested in surviving _as_a_company_. "You mean I have to take a pay cut _and_ I still have to deal with these personnel inefficiencies? No thanks."

Summary: You can't cut wages because workers will just go somewhere else. So, the solution is to print lots of money instead, so the money supply is inflated, and thus EVERYONE's wages go down.

I swear, you have to be a PhD to not see the problems with that idea.

This is a good question. I'm reading the Andy Grove (Intel) biography and there are a bunch of times where they cut wages and a few times when they kept workers that could have been laid off (like when they got out of the watch business).

Quite simply because if they cut wages, those people with cut wages would just leave. And then they would have a mass walk-out on their hands.

Not necessarily. It's only easy to walk out because the majority of companies don't have their employees collectively share profits and losses. If they did, workers would walk out only to share the responsibility someplace else. I think the question becomes much more interesting when you think about it on a larger scale. What if most companies operated like this? Of course, it's all very hypothetical since it's a very socialist philosophy and would require a very, very major shift. It's not going to happen (and I'm not sure I'd be in favor of it either) but it's fun to speculate.

It's also worth mentioning that we already see this sort of thing on a much narrower scale with auto and airline unions. They are often willing to accept wage cuts because their options elsewhere tend to be pretty slim.

There are other contributing factors as well. I imagine that in an exceptionally bleak economy workers would be more willing to accept a pay cut if it meant job security.

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