Most workers would accept a 25% pay cut to avoid a layoff, but employers rarely ask. Researchers are unsure why.

Most workers would accept a 25% pay cut to avoid a layoff, but employers rarely ask. Researchers are unsure why.

The Willingness of Workers to Accept Pay Cuts: A Surprising Discovery

In an intriguing survey conducted by the National Bureau of Economic Research, it was found that a significant number of laid-off workers were willing to accept pay cuts in order to keep their jobs. The results were surprising, challenging the prevailing belief that workers would refuse any reduction in their wages.

The survey revealed that 60% of respondents would accept a 5% pay cut, while more than half would willingly take a 10% reduction, and nearly a third would accept a substantial 25% cut. These findings highlight the lengths to which workers are willing to go in order to avoid unemployment.

What makes these findings even more astonishing is the fact that virtually no employers even discussed the possibility of salary reductions with their employees facing layoffs. Less than 3% of respondents reported being offered a salary reduction, despite their willingness to accept one. This stark disconnect left the researchers perplexed and posed a question: why were employers reluctant to offer wage cuts when workers were open to the idea?

Previous studies, such as Truman Bewley’s book “Why Wages Rise in a Recession,” always suggested that pay cuts were an inefficient method to avoid layoffs because workers simply wouldn’t accept them. However, the current survey challenges this notion. Pawel Krolikowski, a senior researcher at the Federal Reserve Bank of Cleveland, coauthor of the study, stated, “Workers would actually be quite willing to accept pay cuts.”

The willingness to accept lower pay to keep one’s job was consistent across gender, education levels, and experience, with the exception of Black employees who were approximately 12% more likely to accept a salary reduction. The researchers attribute this to higher poverty rates among Black workers, making them more sensitive to job loss and its potential impact on their finances.

Surprisingly, when faced with the possibility of being laid off, workers rarely initiated conversations about keeping their jobs in exchange for a lower salary, despite being open to the idea. Only seven out of 2,567 respondents brought up the topic. This lack of communication further deepens the puzzling nature of the disconnect between worker and employer.

To measure the potential impact of offering pay cuts, Krolikowski and his research partner, Steven J. Davis, estimated that 28% of layoffs could be avoided if willing employees were offered acceptable pay cuts. The number could possibly even reach 35%. However, due to limitations in understanding each respondent’s layoff circumstances, they couldn’t definitively prove the higher estimate. Nonetheless, the researchers argue that avoiding these layoffs would be beneficial for both workers and employers, with the firm reducing costs and employees retaining their jobs.

The fact that almost 30% of layoffs could be avoided simply by lowering employee salaries makes the absence of conversations about pay cuts all the more perplexing. Krolikowski suggests that employers may be hesitant to give up control of personnel decisions to employees, as they can choose whom to lay off but cannot choose who accepts a pay cut.

When asked why employers didn’t raise the option of wage reduction, surveyed workers who would have agreed to such cuts responded with the top answer being “I don’t know” at 38.9%. This suggests that many laid-off workers fail to understand the business considerations that led to their layoffs. Another common response, selected by 36.3% of respondents, was that a pay cut wouldn’t have prevented their layoffs, indicating that some layoffs may be driven by factors other than cost-cutting.

The researchers also highlight concerns about overall productivity as a reason why employers may avoid offering pay cuts. Workers who feel insulted or wrongly treated by their pay may experience reduced morale and diminished productivity. A case study of the tire manufacturer Firestone, involving a recall of 14 million tires and impending wage cuts, supports this thinking.

Furthermore, setting the precedent of pay cuts could raise questions about future negotiations. Employees might seek raises when performance is strong, while firms may try to impose pay cuts even when times are good. Establishing credibility in such situations could become challenging.

In conclusion, the willingness of workers to accept pay cuts in order to avoid layoffs is a surprising finding that challenges previous assumptions. The disconnect between worker and employer regarding pay cuts remains puzzling, with employers often unwilling to broach the subject even though workers express openness to the idea. Further research is needed to explore the underlying reasons and potential benefits of implementing pay cuts as a means to preserve jobs.