As An Employer Wants To Reduce The Production Cost During The Economic Recession,
He/She Could Choose To (1) Lay Off Some Workers Without Changing Wages Or (2) Keep
All Workers But Cut Wages For All. Which Method Would You Choose? Why?
Ultimately, cutting nominal wages within an organization is very difficult. Specifically
during recessionary times, firms may be unable to appease their employees by allowing them to
keep their job but cutting their gross pay. What’s more, The Bureau of Labor Statistics noted that
between 2010 and 2014, “the average real wage fell by 1.1%, down significantly after rising an
average of 3.4% on average between 2006 and 2010” [ CITATION Har15 \l 1033 ]. Ultimately,
many employees do not accept pay cuts well. Demonstrating this, Chen and Horton (2009)
demonstrate through field experiments that reducing an employee’s wage bill causes a reduction
in output, efficiency and overall morale [CITATION Che09 \l 1033 ]. Through several different
methods, Chen and Horton (2009) show that workers were more likely to do additional work
when: “we offered the previous wage (G1); we justified the wage cut in terms of increased
productivity (G4); we indicated others are accepting the cut (G6); we failed to flag the wage cut
as a new offer (G7)” [CITATION Che09 \p " 12" \n \y \t \l 1033 ]. Therefore, to best effectively
handle economic recessions and keep skilled workers within the organization is to keep workers
and cut wages for all. In doing this, it is vital to demonstrate to everyone in the organization the
importance of their efforts and follow Chen and Horton’s (2009) field work. In a summarizing
note, the authors affirm that “These worker reactions are fairly easy to understand: workers
reduce output and cooperation when wages are cut for capricious or selfish-seeming reasons, but
workers do not reduce output as much and apparently are still willing to cooperate if the
employer has seemingly valid reasons for his or her actions” [CITATION Che09 \p 17 \l 1033 ].
Under What Condition Should A Firm Continue To Produce In The Short-Run If It Incurs
Losses At The Best Level Of Output?
A business should continue to produce in the short run even while it incurs loss. The
reason for this is that as long as the prices of the product exceed the average variable cost (AVC),
the firm should continue to operate. Even though overall the business is operating at a loss
because of fixed costs, if the firm can increase its output and reach other business markets, the
firm will still be able to succeed and turnover profits. Therefore, the firm can eventually increase
its economic profitability by increasing sales as long as the price of the product is above AVC.
References
Chen, D. L., & Horton, J. J. (2009). The Wages of Pay Cuts: Evidence from a Field Experiment.
Berkman Center for Internet and Society at Harvard Law School, 1-31.
Hartley, J. (2015, 05 31). Sticky Wages And Nominal Rigidities: Why Nominal Wages Have Been
Stagnant Since The Great Recession. Retrieved from Forbes:
http://www.forbes.com/sites/jonhartley/2015/05/31/sticky-wages-and-nominal-rigidities-
why-nominal-wages-have-been-stagnant-since-the-great-recession/
