So, serious question. If a company's productivity goes down, why do they go straight from having employees at full compensation, down to layoffs? Especially for senior people making $160k+ salaries. Would it not benefit the company to offer the employees the option to stay on at a greatly reduced pay rate, let's say $60k for a $160k job? Many would of course choose to quit, but it seems clear to me that a skilled person's contribution to a company doesn't suddenly have "zero" value. That is simply too strange for me to believe.
Also, yes, obviously having employees does create overhead costs. But again, if the employee's previous compensation was very high, can the compensation cut really not be enough to "make up" for the overhead cost of employees?
Similarly, why do companies leave jobs open waiting for the perfect candidate, instead of offering an extremely low pay to someone who is "almost" qualified? Does someone's contribution truly have "zero" value simply because it might take them 2 months to get up to speed? If they are concerned about retention, they could structure the compensation as [very low rate] for first 3-6 months, then higher rate after the employee gets up to speed. This would give an employee an incentive to not jump ship, and thus in theory should alleviate the company's retention concern, I would think. Why does almost no company do this?
Posted by ScienceGuy1006
2 Comments
What you are referring to is known as sticky wages. Wages are nominally rigid at the zero lower bound, meaning people very rarely take pay cuts. This is very important for macroeconomics and explains a large part of why unemployment can increase in response to negative shocks to the economy.
See the following paper, amongst many others, on why this is important.
https://www.nber.org/system/files/working_papers/w16130/w16130.pdf
Why this happens is a bit more of a mystery. What is likely happening is that people really hate taking nominal pay cuts even if they can tolerate real pay cuts (money illusion). Companies would therefore prefer to have, say, 25% of their workforce unhappy but not working there anymore than 100% of their workforce demotivated because they’ve been forced to take a paycut. There are other explanations for nominal wage rigidity but only money illusion explains the clustering at and slightly above zero that is observed in the data (figure 5 in the pdf I attached).
>So, serious question. If a company’s productivity goes down, why do they go straight from having employees at full compensation, down to layoffs? Especially for senior people making $160k+ salaries. Would it not benefit the company to offer the employees the option to stay on at a greatly reduced pay rate, let’s say $60k for a $160k job? Many would of course choose to quit, but it seems clear to me that a skilled person’s contribution to a company doesn’t suddenly have “zero” value. That is simply too strange for me to believe.
Well, there’s certainly a lot more to it once you really get into the weeds, but a major factor is that as it turns out, people *really* hate being paid less.
You have to consider that firms and workers expect that the most productive and “valuable” employees have the best chance to land another job so just “cutting wages” might mean you are left with the less productive employees. Firing people certainly isn’t good for morale, either, but allows you to select who to fire and keep the “better employees” on staff.
So it’s not just a matter of “the numbers” but also different incentives and effects that come with lowering wages vs. firing people.
>Similarly, why do companies leave jobs open waiting for the perfect candidate, instead of offering an extremely low pay to someone who is “almost” qualified? Does someone’s contribution truly have “zero” value simply because it might take them 2 months to get up to speed? If they are concerned about retention, they could structure the compensation as [very low rate] for first 3-6 months, then higher rate after the employee gets up to speed. This would give an employee an incentive to not jump ship, and thus in theory should alleviate the company’s retention concern, I would think. Why does almost no company do this?
I don’t think it’s really that clear cut, plenty of companies don’t have such a selective hiring process.
But ultimately it’s not just about an employees ability to “get into the job”, it’s about their long term performance. If your “worse candidate” can get up to speed quickly but still only be 90% as productive, you’re still worse off than hiring a “better” employee even if that takes longer. This also heavily depends on who you are and how easy it is to hire and fire people. The US for instance generally has somewhat lower unemployment than many European countries because employee protections are less strong, it’s easier to fire people, so there is less risk in hiring the “wrong” person.