Are pay cuts involuntary?

Knowledge of what lies behind earnings changes is crucial to an understanding of the determination of pay and the distribution of income. A striking feature of the distribution of wage growth observable from individual panel surveys is the diversity of wage growth. Many workers enjoy pay rises, but some appear willing to take pay cuts – in nominal as well as real terms. This paper examines whether apparent cuts do actually occur, and, to the extent they occur, attempts to explain why workers might take pay cuts. The notion of downward nominal ridigity in wages relies fundmentally on the hypothesis that workers dislike nominal cuts. Notably, Bewley (2000) has suggested that pay cuts are avoided because of their adverse e¤ects on workers’ morale. This paper uses panel data on the pay and satisfaction of a large number of individuals in Britain in the 1990s to test this assumption. The evidence for lower morale among those taking cuts is not as strong as might have been expected.