Why do employers prefer laying off staff over cutting everyone's pay during recessions?

When businesses face economic downturns, they often choose layoffs over salary reductions. This video explains the concept of sticky wages, exploring why pay rates resist moving downward even when lower wages might help stabilize the economy.

Sticky wages describe the economic tendency for pay rates to remain fixed rather than decreasing during a recession. While cutting wages across the board might seem like a logical way to reduce labor costs, employers frequently avoid this strategy because it negatively impacts employee morale. Disgruntled workers who experience nominal wage cuts often see a decline in productivity.

Downward adjustments typically occur only when an individual is fired and subsequently rehired by a different company at a lower rate. Employers may instead rely on inflation to manage real wages; for example, if an employee receives a 3% nominal raise while inflation is 5%, their real wage effectively decreases without triggering the same level of workplace dissatisfaction.

Source: Sticky Wages