That a gale is blowing through the Indian job market is no secret. Just ask employees who have lost their jobs in sectors as diverse as airlines and banking. Slow growth has ensured that this will remain a feature of the Indian economic landscape for some time to come.
In such a situation, the question is what do companies and employees choose: job security or salary cuts? That may be a hard question to answer. An easier one to ask would be: what do companies and employees actually do? As reported in Mint on Tuesday, different countries have different answers. The 2008-09 Watson-Wyatt Global Strategic Rewards Survey that looked at the contingency plans of firms in the US and India has some interesting contrasts. The most common contingency planning activity for 52% of US employers was employee layoffs. Only 13% of those surveyed considered a salary freeze. In India, only 23% of surveyed companies said they would lay off employees. Fifty-one per cent of the firms argued for lower salary increases.
What does mainstream economics say about these remarkable reversals? They have less to do with cultural differences and more to do with different reasons for wage stickiness during recessions.
Truman Bewley, a professor of economics at Yale University found that there are different reasons for wage stickiness in different sectors. Salary reductions are more likely in those firms where demand for labour is more sensitive to prices changes. Airlines and financial firms where competition between rivals is fierce are more likely to witness reduced salaries than, say, a firm manufacturing light bulbs.
What Bewley’s work has revealed is that there is no single answer to the choices made by firms and employees. There is no single, optimal, solution to such situations.
This, however, only states the reasons for what is observed and does not answer the original question: job loss or a salary cut? A voluntary job loss has the potential to become permanent if one is not on the right side of the age curve. In addition, retrenchments have serious effects on employee morale. Equally, salary cuts beyond a point may be unconscionable and may eat into employee productivity and may end up harming companies even more.
What would you choose: a job loss or a salary cut? Tell us at firstname.lastname@example.org