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Sharing the sacrifice, minimizing the pain: Optimal wage reductions.


ABSTRACT: Faced with temporary revenue shocks, employers may implement wage reductions - a common response to COVID-19 for U.S. universities. I provide a framework for optimal reductions when labor is inelastic wherein a planner balances "minimizing the pain" and "sharing the sacrifice." I show that for a broad class of utility functions the optimal schedule includes (1) a cutoff wage below which the reduction is zero and (2) weakly progressive reduction rates above the cutoff wage. I illustrate the results using data from a large U.S. university.

SUBMITTER: Miller K 

PROVIDER: S-EPMC7445489 | biostudies-literature | 2020 Nov

REPOSITORIES: biostudies-literature

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Sharing the sacrifice, minimizing the pain: Optimal wage reductions.

Miller Keaton K  

Economics letters 20200825


Faced with temporary revenue shocks, employers may implement wage reductions - a common response to COVID-19 for U.S. universities. I provide a framework for optimal reductions when labor is inelastic wherein a planner balances "minimizing the pain" and "sharing the sacrifice." I show that for a broad class of utility functions the optimal schedule includes (1) a cutoff wage below which the reduction is zero and (2) weakly progressive reduction rates above the cutoff wage. I illustrate the resul  ...[more]

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