Companies almost never offer workers pay cuts leading up to layoffs, despite workers’ willingness to accept even deep pay cuts to avoid losing their jobs, a new study finds.
The National Bureau of Economic Research’s survey of recently laid off workers found that 60% would take a 5% pay cut to keep their job. Meanwhile, more than half would accept a 10% pay cut and nearly a third would accept a 25% pay cut if it meant keeping their jobs, illustrating the effort workers would put into avoiding unemployment.
Perhaps most shocking was the fact that virtually no employers even raised the subject while their employees were facing layoffs. Less than 3% of respondents said they were offered a pay cut to save their job, even if they accepted it. The decoupling was so strong that even the researchers were left stunned.
“Employers’ reluctance to offer pay cuts becomes more puzzling given workers’ widespread willingness to accept them,” they write.
Previous scholarships on the subject, such as Truman Bewley’s book Why Wages Rise in a Recession, has always suggested that wage cuts were an inefficient method of avoiding layoffs because workers simply would not accept them, the newspaper said. “Previous research leaves open the possibility that workers would simply refuse these pay cuts,” said Pawel Krolikowski, a senior research economist at the Federal Reserve Bank of Cleveland, who co-authored the study. Fortune. “I think our newspaper says that is often not the case. Workers would actually be quite willing to accept pay cuts.”
The willingness to accept a lower wage to keep your job was true regardless of gender, education level, and experience — with one exception: black workers were about 12% more likely to accept the pay cut rather than a layoff. Krolikowski and his research partner Steven J. Davis, an economics professor at the University of Chicago Booth School of Business, believe this is a function of higher poverty rates among black workers, making them more likely to show “a greater sensitivity” to a possible job. loss that could affect their finances, they write in the newspaper.
Even more confusing, when faced with the possibility of being laid off, employees almost never initiate a conversation about keeping their job in exchange for a lower salary, even though many report being open to the idea . Only seven of the 2,567 people in the survey — all of whom received unemployment benefits in Illinois between September 2018 and July 2019 — said they brought up the topic.
When faced with this discrepancy between workers’ willingness to accept a pay cut and employers’ reluctance to offer it, Krolikowski and Davis considered how many layoffs could be avoided if bosses and employees could take a pay cut. find one that worked for both parties. Based on their current research, 28% of layoffs could have been avoided by offering a willing employee a pay cut they deemed acceptable. They estimate the number could be as high as 35%, but to prove it conclusively would have required a better understanding of the exact circumstances of each respondent’s dismissal. Avoiding these layoffs would be in the “joint interest of employee and employer,” Krolikowski and Davis write, because the company would still be able to reduce costs, while the employee would keep their job — the benefits of which are obvious.
The hard evidence that nearly 30% of layoffs can be avoided by cutting an employee’s salary makes the near total absence of these conversations even more baffling. When asked why this is the case, Krolikowski argues that it is because employers are hesitant to hand over control of staffing decisions to employees. “Employers can choose which employees they want to fire; they can’t do that with a pay cut,” he says.
As part of the study, Krolikowski and Davis asked the laid-off employees they interviewed who would have agreed to a pay cut why they thought their employers didn’t raise it as an option. The best answer with 38.9% of the responses was “I don’t know.”
This result suggests that many job losers do not understand the business considerations that led to their layoffs.
The second most common answer, “it wouldn’t have prevented my firing”, which was chosen by 36.3% of respondents as the reason their employers didn’t offer a pay cut, illustrates the reality that not all firings are purely cost-related. made. – cutting reasons. Some may arise because an organization has shifting priorities and wants to replace employees from a division it no longer deems essential with a workforce in another part of the company. Krolikowski acknowledged this, calling it an “important question”, but declined to comment further as it was outside the scope of the investigation.
The other reasons why employees thought they were not being offered pay cuts point to considerations about the company’s overall productivity. Eight percent of respondents cited two possible explanations: fear that the best employees would quit and that lower salaries would undermine morale. “Productivity suffers when employees feel insulted or mistreated by their wages,” the paper says.
In this scenario, the thinking goes, the company would be worse off with a large number of dissatisfied employees than with a continued shortage of staff due to mass layoffs. The newspaper cites a case study from tire maker Firestone, which saw a recall of 14 million tires coinciding with the announcement of looming wage cuts in an upcoming union contract.
There’s also the practical issue of predicting who the unhappy and unproductive workers would be, Krolikowski adds. “If these workers can be identified in advance, it may be best to fire them and propose a pay cut for others,” he says. “But if they can’t be identified in advance, or if it’s not feasible to selectively fire these workers, broad layoffs may be the best course of action.”
Another reason pay cuts in exchange for jobs are so rare is that it could set a precedent: workers can ask for a raise if performance is good, and companies can ask for pay cuts whenever they want. “Can they always come and say: I want a pay cut, even if times weren’t bad?” Krolikowski says. Those “firms seeking a pay cut may not be credible.”
This story was originally on Fortune.com
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