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Perspectives From a Vantage Point

Opinion

Hypocrisy?

An interesting thing happened earlier tonight in the macroeconomics class. The topic of the moment was stickiness of prices, especially wages. Professor mentioned that employment contracts are long term and the wages don’t fall quickly enough for markets to clear.

Now, let me tell you, these are MBA students with very little, if any, background in economics. Most of them lean left, as far as I know.  I am the only libertarian in the class. If there is a conservative, I do not know who that is. We are talking Silicon Valley here, folks.

I earnestly asked a question to the professor – as to why the employers prefer to cut headcount rather than wages! Granted, there is always a 3-5% of the bottom of the employee pool which is not productive to justify their place in the company, and employers often see a decline in sales/profits as an opportunity to trim away that fat. Who could blame them? However, even when the proposed layoffs are 10, 15 or 20%, employers very rarely use pay cuts as opposed to head count cuts. I really do not know why, hence I asked the question mentioned above. Before waiting for answer, I took liberty to claim in front of the whole class that if the students were the employees of a company in distress, and if they were asked whether they prefer a 10% drop in head count or a 10% across the board pay cut, most would opt for the 10% pay cut. I suddenly heard the professor, and, also, a bunch of students disagree with me, politely. They all claimed that people would opt for 10% cut in head count.  I reminded them that the people who choose to put 10% of the heads on the chopping block will not know if one the head is going to be theirs.

Why is this interesting? The professor, from time to time, says that some of the (Keynesian) policies are necessary to care for the poor, the sick, the hungry etc. she often implies that her ideological opponents often do not care about these things.  The whole class usually agrees, I can tell from their reaction to such innuendo.  This even confirms my suspicion about the left.  Their caricature of libertarians as uncaring, selfish group of people is a façade – it is clear that many a progressive personally do not care at all the poor and the downtrodden. Given a choice between losing 10% of the pay and sending their friends to the poor house, most of the would choose the latter.  They just accuse others of being uncaring.  Charity and caring comes from one’s heart; its costs come straight out of one’s own pocket, but not according to these folks, to them it should come from their neighbor’s pocket. How else should I interpret this?

  • josef.gether

    I completely agree. And I have a real life experience that proves your claim. After the crisis hit Austria, my company had to lay of workers. (In the boom years they hired really lots of people). So without a cut of the headcount it would have been impossible to continue. But to keep it within limits the company proposed a voluntary cut in salary that varied on income (lowest 5% going up to 25% for management.) About 95% of all stuff agreed. After more than a year later, when the economic situation got better, they canceled the pay cut, and paid the full wage again.nnThe pay cut was achieved in quite a short time in a combined effort by management and workers council.nCompany: AVLnnRegards

  • Anonymous

    So, they discovered they’re as self-interested as the rest of humanity, did they?u00a0 nnDo you suppose they understood what just happened?u00a0 I bet they didn’t.u00a0 These are, after all, people whose idea of morality and kindness is using the threat of violent force to rob peaceful, productive individuals under the pretext of helping the poor (whom they usually deride).u00a0 nnVery nice post, Subhi.u00a0 Nice work in that class.

  • http://profiles.google.com/james.e.hanley James Hanley

    My wife was in this situation about three years ago, working for a small community theater organization.u00a0 They had a simple stark choice between cutting employees or cutting salary, and all agreed to cut salary to preserve jobs.u00a0 The fact that there are only a handful of employees and they all knew and liked each other may go someway toward explaining that decision in their particular case, but it’s still a data point against the professor’s claim that people would take the cut in headcount.u00a0 Perhaps that prof should step away from macro for a while and study some behavioral economics.

  • Subhi

    They didn’t understand at all. In fact, they told me that cutting pay would cause stress to all the remaining employees. Which again proves my point, the fact that the people they worked with, probably for years, losing their job wouldn’t cause them any stress!nnI told them that the mere fact they would be doing the additional work of those who got laid off will also beu00a0 a source of stress. nnI confidentlyu00a0brought up the example of asking the employees if they wanted layoff or paycut thinking that all these progressives really care for the poor and the downtrodden, just like most of us who are normal human beings. I should have known better.

  • Subhi

    Indeed. I was open to the idea that I missed something. With these comments, I’m quite convinced that it is indeed hypocrisy.

  • Subhi

    I gave AVL a quick search. Is it an auto consulting company?

  • josef.gether

    Yep it is. We provide engine development and the measuring devices for engine development.nnThis is one of the really cool test beds we u00a0have at AVL Schrick: http://www.youtube.com/watch?v=Ny9xl7iWayUnnI tried to look for an English article that covers this story, but I could not find one.nnRegarding the point from James Hanley below: At the headquarter in Graz we have over 2000 people. So it also works with more people.