The unlucky firms can raise the wages they pay by less than the average, while the lucky firms can give above-average increases. Because they do not want to do this, they keep relative wages too high and employment too low. Spillovers cause effects on the economy as a whole to be greater than the employment effects in the affected firms. Evidence on the Frequency of Wage Cuts Employers almost never cut their employees' wages because they fear that doing so would cause serious morale and staff retention problems. Studies of popular sentiment suggest why.
Most people consider it unfair for a firm to cut wages, except in extreme circumstances.
On the other hand, most do not consider it unfair if a firm fails to raise wages in the face of high inflation. Downward money-wage rigidity used to be a core tenet of macro economics. But the validity of this assumption is now doubted by many macro economists. A series of recent studies argues that money wages are almost as flexible downward as upward. We have reviewed a wide range of data on this question, and we reject these findings.