Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/300975 
Year of Publication: 
2024
Series/Report no.: 
IZA Discussion Papers No. 17079
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
We investigate how the incompleteness of an employment contract - discretionary and non-contractible effort - can affect an employer's decision about cutting nominal wages. Using matched employer-employee payroll data from Great Britain, linked to a survey of managers, we find support for the main predictions of a stylised theoretical framework of wage determination: nominal cuts are at most half as likely when managers believe their employees have significant discretion over how they do their work, though the involvement of employees, via information sharing, reduces this correlation. We also describe how contract incompleteness and wage cuts vary across different jobs. These findings provide the first observational quantitative evidence that managerial beliefs about contractual incompleteness can account for their hesitancy over nominal wage cuts. This has long been conjectured by economists based on anecdotes, qualitative surveys, and laboratory and field experiments.
Subjects: 
wage rigidity
employment contract
workplace relations
employer-employee data
JEL: 
E24
E70
J31
J41
Document Type: 
Working Paper

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