Eastern Economic Journal |
Volume 28, Number 3, Summer 2002 |
BOOK REVIEW Why Wages Don't Fall During a Recession. By Truman F.
Bewley. Timothy Koechlin Vassar College Why Wages Don't Fall During a Recession provides a persuasive explanation of wage rigidity and, in the process, offers an array of important insights into work places and labor markets. This terrific book describes how employers think about hiring, firing, pay, and worker performance, and it tells a compelling story about how these ideas (and associated behaviors) influence labor market outcomes. Bewley's model of pay determination contradicts many influential explanations of wage rigidity, particularly those in the neoclassical tradition. Perhaps most importantly, this book raises some basic questions about economic theory and methodology. Bewley bases his conclusions on interviews with more than 300 "business people, labor leaders, counselors of the unemployed, and business consultants" [1] during the recession of the early 1990s. Their individual comments are often fascinating and, collectively, they tell a remarkably consistent story. It is the story of a social workplace occupied by human beings with motivations that are more complex than mainstream economists typically assume. "A model that captures the essence of wage rigidity," Bewley writes, "must take into account the capacity of employees to identify with their firm and to internalize its objectives. This ... calls for material, moral and symbolic reciprocation from company leadership" [1-2]. Bewley reports that managers think about "dealing with employees around the concept of morale. Good morale is thought to be vital for productivity, recruitment and retention" [41]. Managers are reluctant to cut pay, even during hard times, because "cutting pay ... hurts morale and increases labor turnover" [432]. One human resource manager explains that "(i)t is important for an employer to be viewed as fair .... People will leave if not treated equitably" [46]. An owner of a small, non-union firm tells Bewley "I want employees to be happy, because their happiness affects their productivity" [49]. The employers interviewed by Bewley overwhelmingly believe that "a firm would lose more money from the adverse effects of cutting pay than it would gain from lower wages and salaries" [431]. One advantage of layoffs is that, unlike wage cuts, they "get the misery out the door" [16]. This book employs the methods of institutionalist labor economists -- relatively open-ended conversations designed to elicit information about institutional and behavioral realities. Bewley recognizes the limitations of this method, most notably that his sample may not be representative, his subjects may not understand their own behavior and. of course, that his conclusions rely uncomfortably on his interpretation of the data. This said. Bewley provides a spirited defense of primary qualitative research, an approach that allows him to learn things that he could not have learned with another method. "It would be presumptuous to ignore the testimony of people who make economic decisions and observe and participate in economic life. To do so would be to make economics a religion rather than a responsible analysis of experience" [14]. This book reaches a number of important and, in some cases, surprising conclusions. I will list only a few here. First, worker effort is variable and endogenously determined; so managers must recognize that their decisions about hiring, firing, compensation and the day-to-day operation of the workplace may affect worker effort and productivity. Second, concerned about the effects of pay cuts on morale, productivity and turnover, employers generally respond to lower product demand by slowing wage growth and laying people off. Third, Bewley's data suggest that "labor is in excess supply during recessions, so that the Keynesian side of the macroeconomic debate is the more accurate view" [17]. Fourth, employers are very concerned about internal pay equity because they believe that setting pay according to "reasonable and impartial" [82] criteria enhances morale. Setting pay relative to "the market" is much less important, in large part because workers know so little about what other firms pay. Fifth, employers are reluctant to hire overqualified workers "because of concern that they would quit to take better positions or might be unhappy or a threat to their supervisors" [18]. Sixth, compensation norms differ between the primary and secondary sectors. Pay of existing employees is downwardly rigid in both sectors, while the pay of new hires is significantly more flexible in the secondary sector, where concerns about internal equity and turnover are less important than in the primary sector. In an excellent review of the wage rigidity literature, Bewley concludes that his data contradict most theories of wage rigidity, including those of Rapping, Lucas, and other neoclassicists who argue that unemployment is essentially voluntary. He also rejects "shirking theory," which has firms paying higher-than-market-clearing wages to increase the efficacy of the threat of dismissal. When asked about the shirking model, managers overwhelmingly responded that this implicit threat would be bad for morale. Bewley [421] concludes that the only reasonable theory of wage rigidity is the morale theory of Solow and Akerlof, which emphasizes the impact of wages and wage cuts on morale, perceptions of fairness, and productivity. In the penultimate chapter of his book, Bewley presents a "morale theory of wage rigidity" as inspired by his interviews. The final chapter suggests areas for future research. Although this is a book about wage rigidity, its greatest contribution may be that it revives some crucial questions about how we study the economy. Bewley argues that in economics "it is too easy to believe what one wants to believe," [15] and that economists too often indulge "in fanciful theoretical representations of reality" [464]. He confesses that he "wasted years inventing theories describing impediments to pay cuts" [15]. His conclusion -- literally the last sentence in this fine book-- is as simple as it is important: "I believe I have shown that much can be learned by confronting economic reality" [468]. Bewley has shown this indeed. |