Abstract
Although employers traditionally have maintained existing real wages in the face of a declining market-clearing (equilibrium) wage (the “sticky wages” phenomenon), it has recently been observed that some firms reduce real wages in this situation. In order to understand the varied ways in which employers respond to a decline in the clearing wage, this article develops a framework integrating perspectives from efficiency wage theory with perspectives from human resource management, institutional economics, and strategic management. The framework suggests that such varied responses result from variation in factors likely to inhibit reductions, even when reductions would be efficient and variation in factors likely to affect the efficiency of reducing wages. The implications of the framework for research and practice are also discussed.
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