Dear Economist

Should we take a pay cut?

Should my co-workers and I accept a pay cut to preserve our jobs?
David A, London

Dear David A,

In principle, of course you should: this is so obvious that I’m not even sure why you bothered to ask. Another way of phrasing this question is to ask whether you would rather have most of your old salary or none of it.

You might object that unemployment has one big advantage over a pay cut: it means that you don’t have to work. For most people, however, this is not an advantage. The economist Andrew Oswald, one of a growing clan of “happiness economists”, has found that unemployment is extremely distressing, far more than could be explained by mere financial loss. If he is right, jobs bring happiness and self-respect, and even a severe pay cut is worth taking on the chin if that’s what it takes to stay in work.

It is true that taking a pay cut may result in a lower salary for many years, but losing your job, especially in a recession, is worse: your skills depreciate rapidly and you are quite likely to be worse off for the rest of your life.

You might reasonably ask why it isn’t more common to see swingeing pay cuts in place of redundancies. They are preferable for employees and probably preferable for employers, too. After all, sacking people is costly, as is going short-staffed and re-hiring people when things pick up. Far better just to squeeze salaries.

But that’s too easy. I suspect that there is a strong bias against salary cuts because otherwise employers would be demanding them every couple of weeks, with the flimsiest of excuses. Sacking somebody, in contrast, is not something an employer will tend to do lightly.

That is why “either pay me properly or sack me” is a good negotiating position. But, like many good negotiating positions, it may occasionally backfire.

Also published at ft.com.

22nd of November, 2008Dear Economist • Comments off