WHY NOT CUT PAY

I interviewed over 300 business people, labor leaders, business consul tants, and counselors of unemployed people, all in the Northeast of th e United States, during the recession of the early 1990's in order to learn why wages and salaries declined in only a few firms. Employers w ere reluctant to cut pay because they believed doing so would hurt emp loyee morale, leading to lower productivity and current or future diff iculties with hiring and retention. It was thought that these effects would in the end cost more than the savings from lower pay. There were few indications that unemployed people had excessive wage expectation s. On the contrary, many unemployed were too flexible and found themse lves rejected by firms as overqualified. In most companies, pay cuts w ere not a useful alternative to layoffs, because pay cuts would not ma ke it worthwhile to retain many employees and because layoffs harmed m orale less than would pay cuts. The findings support none of the theor ies of wage rigidity except those of Solow and Akerlof that emphasize morale. (C) 1998 Elsevier Science B.V. All rights reserved.