Quote of the day

I've started Truman F. Bewley's book Why Wages Don't Fall During a Recession.  The book reports Bewley's research program that involved interviewing "more 300 businesspeople, labor leaders, counselors of the unemployed and business consultants in the Northeast of the United States during the recession of the early 1990s".

Here's the quote.

From the interviews, I conclude that wage rigidity stems from a desire to encourage loyalty, a motive that superficially seems incompatible with layoffs. My findings support none of the existing economic theories of wage rigidity, except those emphasizing the impact of pay cuts on morale. Other theories fail in part because they are based on the unrealistic psychological assumptions that people's abilities do not depend on their state of mind and that they are rational in the simplistic sense that they maximize a utility that depends only on their own consumption and working conditions, not the welfare of others.

To me this type of research is an avenue too rarely employed in economic research (a notable exception being Alan Blinder's work). It suggests that the an economic toolbox that contains only rationality, and is unable to incorporate other crucial elements of human behaviour such as loyalty, is destined to poorly explain real patterns of social organisation.