Why do wages resist crises?

Those reading from France have heard it time and again: growth is stagnant, the labour market is tightening, financial markets are uneasy. Elsewhere, the outlook is scarcely brighter. Across the Rhine, Germany celebrates having emerged from a recession, only to register an economic growth of 0.2 per cent. The OECD, for its part, warns of a slowdown in economic activity in 2026.

In such a climate, it is not unreasonable to feel anxious about the future, especially regarding the possibility of a reduction in one’s pay. Intuitively, one might expect pay to adjust to economic conditions. Yet, even in a recession, wage levels remain steady. This relative "rigidity" has puzzled economists for decades. It plays a key role in the functioning of the labour market and for the effectiveness of monetary policy, a major tool that helps stabilise the economy. 

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Dialogues économiques is a digital journal published by the Aix-Marseille School of Economics (AMU, CNRS, EHESS, Centrale Méditerranée). As a bridge between academic research and society, Dialogues économiques provides all citizens with the keys to economic reasoning. Articles are published every two weeks.

When a company sees its turnover decline, one might expect a reduction in wages to preserve profitability. More often, however, businesses opt for an alternative course: reducing the workforce. At the level of the economy, this makes employment the primary variable of adjustment, with predictable knock-on effects: lower consumption, reduced tax revenues, higher social protection spending, and so forth.

A rigidity that defies easy explanation

Although wage rigidity is well established in economic analysis, along with its consequences for the macroeconomy, its underlying causes remain difficult to measure.

Anecdotes and managerial testimony collected by researchers in the 1990s suggested that firms are reluctant to cut wages for fear of damaging employee morale and productivity, and ultimately their own profitability. On this view, lowering wages may prove an ineffective means of reducing costs.

As plausible as this explanation may appear, it has been difficult to demonstrate a direct link between these managers’ perceptions and the likelihood of wage cuts. The difficulty lies in measuring something as intangible as employee morale and productivity in empirical data.

It is precisely here that Marco Fongoni, Daniel Schaefer and Carl Singleton offer fresh insight. They focus instead on a feature that can be more readily observed: managers’ perceptions of their employees’ discretion at work.