The NYT proves its own econ columnist wrong

[babylonsister]

Oops!

http://business.theatlantic.com/2009/03/the_nyt_proves_its_econ_columnist_wrong.php

Mar 26 2009, 4:23 pm by Conor Clarke

The NYT proves its econ columnist wrong


The New York Times reports on bad news at the New York Times:

Facing a steep drop in revenue, The New York Times Company plans to cut the pay of most employees by 5 percent for nine months, in return for 10 days' leave, and will lay off 100 people and make other budget cuts, executives said on Thursday.

This is an usual way of cutting costs. Sticky-wage theory says that across-the-board salary cuts are rare because they have across-the-board effects on company morale. Layoffs, on the other hand, "get the misery out the door." I know this because New York Times economics columnist David Leonhardt wrote a piece about it a few months ago, in which he argued that the price of labor does not fall in a recession:

Jobs are disappearing, bonuses are shrinking and raises will be hard to come by. But the drop in prices, which isn't over yet, will make life easier on millions of people. It's possible, in fact, that the current recession will do less harm to the typical family's income than it does to many other parts of the economy.

The reason is something called the sticky-wage theory. Economists have long been puzzled by the fact that most businesses simply will not cut their workers' pay, even in a downturn. Businesses routinely lay off 10 percent of their workers to cut costs. They almost never cut pay by 10 percent across the board.

Traditional economic theory doesn't do a good job of explaining this. During a recession, the price of hamburgers, shirts, cars and airline tickets falls. But the price of labor does not. It's sticky.

Not that sticky.

[northernlights]

1. yeah, like being constantly afraid

that you'll be out in the next round of layoffs doesn't hurt morale.

Digital Equipment had nonstop layoffs during the last 7 or 8 years that I worked there. The environment was brutal and the stress miserable.

[babylonsister]

2. 7-8 years? Wow. Seems like

DE had a problem to begin with. But the stress must have been brutal.