Salary change in times of recession is one of the most profound dilemmas of the economic science. Over the course of this century, numerous schools of economic thought have disputed the true explanation of the fact that, during recessions, the nominal salary usually does not fall below the real one as much as it should, in light of GDP and unemployment. In other words, the question is why is the labour market - unlike other markets in the economy - so rigid about prices, especially during recessions?
Beyond the argument that the labour market is much different from the other markets in the economy, it is true that people can hardly accept a salary cut, even if sometimes there are serious and convincing explanations about their need. Still, an amusing element often surfaces in the issue. No one likes to have his or her salary cut - the amount of money they actually get from the employer. But there is much less objection when the real salary is under discussion - the amount of products and services one can afford with the nominal salary. In Romania over the last ten years, nominal salaries have generally tended to grow, whereas, due to high inflation, real salaries have been going the opposite direction. In terms of GDP productivity, the terms most suitable to judge the real economy, nominal salaries should not have grown at all in the last four years but, rather, they should have followed the same trend as the GDP. Nevertheless - because of inflation - they continued spiralling upwards, thus contributing to an even more pronounced growth of their number one enemy: inflation. What is the explanation of this phenomenon and how can we break this vicious circle between nominal salary, inflation and real salary?
One of the most interesting explanations for salary rigidity during recession times belongs to the neo-classical school, and it holds that this rigidity is in fact an illusion. In reality, workers give up their jobs when they become less attractive income-wise. Thus, when the staff size goes down, the salary tends to remain fixed (in fact, it may grow) and this, in turn, produces the appearance of rigidity. Unfortunately, this approach can hardly be accepted because it states that, during recession, unemployment is exclusively voluntary, that is, people don't want to, rather than cannot, get a job.
On the other hand, another opinion block is the Keynesian, which holds that trade unions are responsible for salary rigidity. Workers, who appreciate this school of thought, are constantly eyeing their competition on the labour market, in other words, they are first and foremost preoccupied with how much they earn, and are not willing to accept a cut as long as this cut does not propagate into other sectors. The degree of trade union penetration, in the context of this explanation, has a very important role. For instance, where unions play a major part in the economy, as in Germany, for instance, large trade unions will say that, while the same salary growth works for all categories, it will result in a generalised growth of prices and therefore inflation, affecting all employees. Therefore, perhaps paradoxically, in economies with a centralised trade union sector, during recession, nominal salaries may grow at a slower pace than in an economy with a decentralised economy, or may even fall slightly. Because a decentralised union sector could sharpen the struggle for salaries between unions, no trade union will accept a salary drop if it knows that, meanwhile, another union may negotiate a raise, or at least a constant level. The problem is found in the theory of games: cooperate (accept a salary drop) if the partner cooperates, too, and don't cooperate (don't accept a drop) if the partner does not. Since the union sector is decentralised, chances for unions to cooperate are scant, perhaps non-existent, so the best solution, regardless of the others' action, is not to accept a salary cut, but rather to ask for a raise.
Another explanation for salary rigidity comes from a fraction of the Keynesians who hold that companies intentionally pay high salaries and let them grow further, even during a recession, to prompt higher employee costs and therefore encourage better productivity.
All these explanations might be true. After all, there is logic in each of them. But on the other hand, a number of recent studies have shown that employees are by far less preoccupied with how much other people in their situation are paid. And then, what is the explanation for salary rigidity?
Unable to find an economic explanation why nominal salaries stay put in times of recession, we will have to do with a social explanation. Recessions are particularly difficult periods, both for the economic environment (for companies and their profits) and for the social environment (for the employees and their daily basket). In these periods, more than ever, people become increasingly preoccupied with how their multiplying efforts impact on their living standards. Thus, companies do not downsize salaries although, financially, they could achieve major savings. But the cost of such a step would exceed the gain. How? Simply - lowering employees' morale, motivation and standard of living lowers their capacity to be productive. According to a recent study by Harvard University Press, motivated employees are more productive than the others not necessarily because they work better but because they better identify with company goals.
Another interesting conclusion of the study is that, in a recession, layoffs are more efficient than salary drops. The former affect only the laid off, and have no bearing on the rest, aside from a transient feeling caused by their peer relationship. What's more, this effect is short-lived because, in the long term, employees who retain their jobs feel more motivated. Salary cuts, on the other end, affect everyone and degrade motivation throughout the company, beginning with the best employees and through to the least productive.
Therefore, the explanation seems to have more to do with the sociological aspect of the entreprise-employee relationship, confirming once again the difficulty of treating the labour market in the same manner as the other markets in the economy. The macroeconomic environment, with its constraints, has a minor influence and does not provide a unitary explanation of the problem. But it is just as true that, with the efficiency and motivation found in Romanian enterprises - and less in foreign companies working here - once can hardly believe that employee morale, standards of living and self-respect apply with the same consistency as elsewhere.
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