BUSINESS -- The Boston Sunday Globe

July 16, 2000

ECONOMIC PRINCIPALS

     By David Warsh

What is morale?

Truman Bewley is a mathematical economist out of your worst dreams. Hyperplanes, nonconvexities, and all the rest of the apparatus with which the logical coherence of economic thought is examined hold no terrors for him. A 1970 Berkeley PhD, the Alfred Cowles professor of economics at Yale University, Bewley served for years as editor of the Journal of Mathematical Economics.

So it is not without interest to learn that for the past eight years Bewley has spent his spare time interviewing businessmen, labor leaders, counselors to the unemployed, and business consultants in and around New Haven and New York with a view to discovering why labor markets don't behave like commodity markets, in which prices routinely fluctuate up and down.

The resulting book -- "Why Don't Wages Fall During a Recession?" -- is an eye-opener. Not only does it convey an answer to the title question, it illuminates something of the nature of economic inquiry as well.

Bewley's conclusion is that the desire to encourage loyalty is the only convincing explanation of the nearly universal preference for layoffs to wage reductions. "My findings support none of the existing economic theories ... except those emphasizing the impact of pay cuts on morale."

You must understand that the failure of wages to fall during periods of slow business is one of the enduring mysteries of modern economics -- at least to those who are professionally trained. Potato prices decline when supply exceeds demand. Why not the same with workers? Matters would be so much simpler if they did!

Indeed, why don't firms and workers agree to cut wages and salaries when revenues decline during recessions? Then layoffs could be avoided altogether, or nearly so. Profitability could be maintained. Wouldn't everybody be better off with flexible wage?

Economists have devised all sorts of theories to explain wage rigidity. Some say that in fact wages are flexible, that when implicit wages fall too low people leave their jobs because they prefer leisure to low-pay work. Others say that groups of company insiders, powerful because of seniority, refuse to take wage cuts and instead force recently hired "outsiders" to be let go. There are shirking models and relative wage models and implicit contract models. Bewley says that he himself "wasted years inventing theories to describe impediments to pay cuts."

Finally Bewley began calling on decision makers. Instead of asking what they thought of economists' theories, he sought to discover how they explained their practices among themselves. He learned to ask questions for 90 minutes, two hours, or sometimes more, making careful notes.

What he found was that in general the managers in his sample "organize their thinking about their success in dealing with employees around the concept of morale."

"Morale is having employees feel good about working for the company and respecting it. The employee with good morale likes his work and is willing to cooperate in moving from job to job. A positive attitude makes it possible to work out good teamwork." So explained the owner of a nonunion manufacturing company.

And so stated the very first manager interviewed the view that eventually would become Bewley's own: "that cutting pay would have almost no impact on company employment, that hiring new workers at reduced pay would antagonize them, that reducing the pay of existing employees was nearly unthinkable because of the impact on worker attitudes, and that the advantage of layoffs over pay reduction is that they 'get the misery out the door'."

But don't employers these days routinely impose "two-tier" pay scales on new employees? Don't they contrive cuts in real (as opposed to nominal) pay by delaying raises and speeding up the rate of work? Of course they do, says Bewley. And such stratagems in the face of technical change and recession need to be closely studied as well. But one thing they don't do is cut money wages, except in the rarest of circumstances. And the reason commonly given is the effect on motivation and the sense of community. The main cause of wage rigidity "are best thought of as having to do with generosity," he says.

Bewley is tough on his fellow economists. "The subject of economics has an enormous impact on everyone's life, and yet the discipline lacks the status of a real science, follows rather than leads ideological trends, and sometimes indulges in fanciful technical representations of reality."

Many theorists concerned with unemployment don't even bother to raise the possibility of fieldwork designed to resolve the ambiguity. Hence Bewley's determined demonstration of the possibilities. Somebody, he says, "just has to do the work."