Why Firms Lay Off Workers instead of Cutting Wages: Evidence from Linked Survey-Administrative Data
by Antoine Bertheau, Marianna Kudlyak, Birthe Larsen, Morten Bennedsen
Abstract. Using a large-scale employer survey linked to administrative records in Denmark, we study why firms lay off workers instead of cutting wages. Most employers can cut wages but often choose not to. We find that pay cuts and layoffs carry asymmetric endogenous costs and often serve different objectives. Firms report that lowering wages triggers morale and turnover costs, while layoffs are selective and their negative impact on the morale of remaining employees is limited. Layoffs often serve workforce composition objectives beyond cost reduction. Among layoff firms, 73\% agree that a pay reduction would not have saved jobs, and 61\% cannot quantify a pay-cut-to-jobs-saved threshold, those that name one do not act on it. At most 23\% of layoff activity is conceptually eligible for substitution. Linked administrative records show that pay cuts and layoffs co-move in distress rather than trade off. These findings call into question the within-firm substitution channel through which the lack of observed pay cuts generates employment losses in canonical macro models.
Paper in Working Paper series: FRB San Francisco, CEPR, Hoover Institution, IZA, SSRN