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Pay cuts and morale : a test of downward nominal wage rigidity

By Jennifer C. Smith


This paper tests the ‘morale’ theory of downward nominal wage\ud rigidity. This theory relies on workers disliking nominal pay cuts:\ud cuts should make workers less happy. We investigate this using panel\ud data on individual employees’ pay and satisfaction. We confirm that\ud nominal cuts do make workers less happy than if their pay had not\ud fallen. But we found no difference in the effect on happiness of cuts and\ud pay freezes. This represents important information about the nature\ud of wage rigidity in practice and the applicability of the morale theory.\ud The morale theory may be able to explain generalised downward wage\ud rigidity, but apparently fails to explain downward nominal rigidity

Topics: HD
Publisher: University of Warwick, Department of Economics
Year: 2002
OAI identifier: oai:wrap.warwick.ac.uk:86

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