Abstract
This paper models the firm as a community à la Akerlof [Akerlof, G.A., 1980. A theory of social custom, of which unemployment may be one consequence. Quarterly Journal of Economics 94, 749–775] to account for asymmetric behavior and, in particular, downward rigidity of wages. It is shown that, through social interaction among workers in the firm community, wage cuts can give rise to a large, discontinuous fall in labor productivity (known as “catastrophe”). Furthermore, this large fall in labor productivity will persist or display inertia (known as “hysteresis”) even if the wages are restored to the pre-cut level and beyond. Our catastrophe/hysteresis finding with respect to wage cuts can rationalize the downward rigidity of wage behavior and is consistent with the interview evidence of fragile worker morale emphasized by Bewley [Bewley, T.F., 1999. Why Wages Don’t Fall During a Recession. Harvard University Press, Cambridge] and others in explaining why employers are sensitive to and refrain from cutting worker pay.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
