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Existing Theories
Truman Bewley Presented by Levon Balayan and Sarah Kim
Outline
Wages downwardly rigid because people withdraw their labor when wages fall
Workers collective or individual bargaining power causes downward wage rigidity Wage rigidity as an outcome of functioning markets
Workers
quit because wages or salaries fall below expectations When wages are unusually low, people become unemployed to enjoy leisure
Criticism
Wage cuts unusual Quits decreased sharply Counselors knew of no one who quit because of pay cut Half of unemployed were laid off Actual pay cuts had little extra turnover
If applicants were holding out for higher pay, it would be difficult for firms to recruit. However, employers overwhelmed by over-qualified applicants
Unemployed had little leisure, due to the time spent looking for work.
Criticism
Consumption declines during unemployment, as leisure is a substitute for goods and services, not because jobless run out of money (Heckman (1974) Ghez (1975)) but
Cab drivers work more during slow days, when hourly wages are low Drivers quit for the day once they reach their target daily income
Criticism
(Hansen (1985)):
Assume workers are indifferent between working and not working Hence, changes in labor demand only affect number of employed and not the real wages
existing employees Outsiders unemployed workers G eneral Model insiders prevent outsiders from taking their jobs or bidding down wages
effectively as individuals
No
association between pay and efficiency creates upward pressure on wages that puts them above the market clearing level Implies existence of unemployment in equilibrium
Criticism
Only
The Turnover and Flat Labor Supply Curve Model (Stiglitz (1974), Schlicht (1978), Salop (1979)) Voluntary turnover in a recession decreases with wage and increases with labor market tightness Firms weigh turnover costs against wage costs when setting pay
Raise wages when unemployment is low to reduce quitting Low unemployment causes wage inflation
fall when unemployment is higher than equilibrium level and turnover diminishes
Although pay has an effect on turnover, quitting anticipated was more a response to bad morale Pay cuts during the recession had little impact on turnover
Assumes higher pay increases productivity through the impact on the morale morale (m-rl')n. - The state of the spirits of a person or group as exhibited by confidence, cheerfulness, discipline, and willingness to perform assigned tasks.
C riticism
Pay levels affect productivity through the quality of workers recruited, but have little impact on morale or work effort Theory is correct to emphasize morale, but undermines the negative impact on pay cuts
Attributes downward wage rigidity to the expense of cutting wages Small deviations of wages from the optimal level derived from turnover and shirking models have little impact on profits
C riticism
Administrative or negotiation costs never interfered with pay cutting Menu costs hardly explain why pay was increased rather than cut
Conclusion
Questions
Discussion
How seriously can we consider the anecdotal evidence countering statistical findings? Which model you think is most realistic? What do you think about Bewleys claim that
Administrative or negotiation costs never interfered with pay cutting?