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Why Wages Don't Fall in Jobs with Incomplete Contracts

Author

Listed:
  • Fongoni, Marco

    (Aix Marseille University)

  • Schaefer, Daniel

    (Johannes Kepler University Linz)

  • Singleton, Carl

    (University of Stirling)

Abstract
We investigate how the incompleteness of an employment contract - discretionary and non-contractible effort - can affect an employer's decision about cutting nominal wages. Using matched employer-employee payroll data from Great Britain, linked to a survey of managers, we find support for the main predictions of a stylised theoretical framework of wage determination: nominal cuts are at most half as likely when managers believe their employees have significant discretion over how they do their work, though the involvement of employees, via information sharing, reduces this correlation. We also describe how contract incompleteness and wage cuts vary across different jobs. These findings provide the first observational quantitative evidence that managerial beliefs about contractual incompleteness can account for their hesitancy over nominal wage cuts. This has long been conjectured by economists based on anecdotes, qualitative surveys, and laboratory and field experiments.

Suggested Citation

  • Fongoni, Marco & Schaefer, Daniel & Singleton, Carl, 2024. "Why Wages Don't Fall in Jobs with Incomplete Contracts," IZA Discussion Papers 17079, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp17079
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    References listed on IDEAS

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    More about this item

    Keywords

    wage rigidity; employment contract; workplace relations; employer-employee data;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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