Why Wages Don't Fall During a Recession

Wages Don't Fall During a Recession: A Study of Wage Rigidity The relationship between wages and recessions is a fundamental question in economics. Despite numerous theories, no satisfactory explanation has been found for why wages do not adjust as quickly as other prices during economic downturns. Truman F. Bewley's groundbreaking study explores this puzzle through extensive interviews with business executives, labor leaders, professional recruiters, and advisors to the unemployed. Bewley's approach, which involved in-depth conversations with over 300 individuals, revealed that executives were reluctant to cut wages even when demand for their products fell sharply. They believed that reducing wages would harm morale, which they saw as crucial for gaining employee cooperation and internalizing company objectives. This finding contradicts most existing theories of wage rigidity, providing valuable insights into the challenges businesses face in managing labor markets. By shedding new light on this complex issue, Bewley's work offers a fascinating perspective on the problems that arise when wages fail to adjust during recessions.