Unsticky Wages? Not so fast.

Over at BusinessWeek, there's a discussion of whether a company should cut pay or lay off workers in a time of distress, with management tending to always prefer laying off workers to cutting the sacrosanct base salary.

There may be a skill effect going on here. In an era/economy dominated by low-skill jobs, a firm could more easily boost productivity by threatening to lay off or actually laying off workers. But in a knowledge economy, many of the workers feel a part of the team and eliminating part of the team can lead to diminishing returns. Just imagine if the Beatles had cut Paul McCartney (or even George Harrison.)

 

BW cites Dan Ariely, the go-to guy for behavioral economics after he wrote the magnificent book, Predictably Irrational, which is also the title of his pretty informative blog. 

Dan Ariely, a behavioral economics professor at Duke University who sees value in cutting pay vs. jobs, notes that salary is what economists call a "positional good," meaning people care more about how much they make relative to their peers than the absolute level of what they take home. That's why Wall Street bankers get angry if their bonuses don't match what rivals are pocketing a few blocks away, and why distressed U.S. autoworkers who have given up years of hard-won benefits take some solace in the knowledge that they still many more than many other industrial workers.

A skills shift? Just maybe there's a clue in this article about Professor Ariely in Haaretz. (Professor Ariely is Israeli.)  

Ariely and his colleagues ran several experiments, among everyday people in India and among American students, in which participants were given a cognitive challenge - such as a memory game or a puzzle - as well as technical tasks requiring little thought, such as fast-paced typing. The researchers promised participants bonuses of varying sizes for good performance. They discovered that when it came to the cognitive tasks, which demanded mental effort, participants who were offered the largest bonuses performed less well than those in the two other groups, which were promised smaller ones. When the task was a purely mechanical one, however, the financial incentive did prove effective. [Emphasis mine.]

This is all interesting stuff.  But Let's not be so fast to say job losses are less frequent in the new (more altruistic?) economy when the facts say the fastest rising rate of unemployment in the U.S. since the 1930s is happening right now.

Sticky Facts

Then again, the facts don't seem to back up the flexible pay argument. The best measure of compensation, according to a friend at the BLS, is the ECI (employment cost index).

Total compensation costs for civilian workers increased 0.3 percent from December 2008 to
March 2009, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.  This follows a 0.6 percent increase for the September to December 2008 period. In March 2009, wages and salaries also rose 0.3 percent, while benefits rose 0.5 percent.

The ECI is a really useful fact-based piece of reality to keep in mind as you are assaulted by news and opinion that Americans are suffering from lifestyle declines.  It is awfully hard to square that with the ECI's report of compensation growing at 2/3 a percent every quarter! Maybe the ECI is a slightly lagging indiciator, but there's no denying a deceleration down to just 1/3 a percentage point last quarter.

Who wants to bet the ECI goes negative?  I'll wager $10 to anyone (or up to 50 anyones) that ECI growth remains positive during 2009.