A new study by researchers from the University of Chicago and the University of Pennsylvania has found that many workers facing a layoff would be willing to accept a 25% pay cut to keep their jobs. However, most employers do not even ask their employees about their preferences, and instead resort to layoffs as a cost-cutting measure. The study suggests that employers could avoid almost 30% of layoffs by offering pay cuts instead, and that this could benefit both workers and firms in the long run.
Why workers prefer pay cuts over layoffs?
The study, which was published in the American Economic Review, surveyed over 6,000 workers in the US and asked them how they would react to different scenarios of potential layoffs and pay cuts. The researchers found that workers valued their jobs not only for the income they provide, but also for the non-monetary benefits, such as social interactions, skill development, and identity. Therefore, losing a job would entail not only a loss of income, but also a loss of these benefits.
The researchers estimated that the average worker would be willing to accept a 25% pay cut to avoid a layoff, and that this willingness varied depending on the worker’s characteristics, such as age, education, income, and tenure. For example, older workers, more educated workers, higher-income workers, and longer-tenured workers were more willing to accept pay cuts than younger workers, less educated workers, lower-income workers, and shorter-tenured workers. The researchers also found that workers who had experienced a layoff in the past were more willing to accept pay cuts than those who had not.
Why employers do not offer pay cuts instead of layoffs?
The study also surveyed over 2,000 employers in the US and asked them why they did not offer pay cuts instead of layoffs when they faced financial difficulties. The researchers found that most employers did not even consider pay cuts as an option, and that they had several reasons for preferring layoffs over pay cuts. Some of these reasons were:
- Pay cuts could reduce worker motivation and productivity
- Pay cuts could signal financial distress and damage the firm’s reputation
- Pay cuts could create legal and contractual complications
- Pay cuts could trigger downward wage adjustments for other workers
- Pay cuts could be difficult to reverse when the situation improves
The researchers argued that some of these reasons were based on misperceptions or outdated assumptions, and that employers could overcome some of these challenges by communicating clearly with their workers and offering them choices. For example, employers could explain the rationale behind the pay cuts, assure the workers that the pay cuts were temporary and fair, and allow the workers to choose between different options of pay cuts or layoffs.
How pay cuts could benefit both workers and firms?
The study concluded that offering pay cuts instead of layoffs could benefit both workers and firms in the long run. For workers, accepting a pay cut could help them avoid the negative consequences of a layoff, such as unemployment, income loss, skill deterioration, psychological distress, and lower future earnings. For firms, offering pay cuts could help them retain their skilled and loyal workers, reduce their hiring and training costs, maintain their productivity and quality levels, and preserve their organizational culture and reputation.
The study also suggested that policy makers could encourage employers to offer pay cuts instead of layoffs by providing tax incentives or subsidies for wage reductions, or by relaxing labor regulations or collective bargaining agreements that restrict wage flexibility. The study cited some examples of countries that have implemented such policies successfully, such as Germany, Japan, and Singapore.
The study’s findings have important implications for the current economic situation caused by the COVID-19 pandemic. The pandemic has forced many businesses to shut down or reduce their operations, leading to millions of layoffs across various sectors. The study’s authors hope that their research will inspire more employers to consider pay cuts as an alternative to layoffs, and that this will help mitigate the economic and social costs of the crisis.