Pay cuts are better than layoffs in this recession

The key feature of modern recessions has been sharply rising unemployment, which creates a self-reinforcing spiral. Unemployed workers spend less, while those who still have jobs increase their savings out of fear that they might be next. (File pic shows workers queing to pick up unemployment forms in the US.)

ECONOMISTS have long explained recessions in part by pointing to the reluctance of employers to reduce workers’ pay. This so-called market rigidity reverberates throughout the economy, creating waves of unemployment and declining growth that are worse than any pay cut.

That’s one reason that the recession caused by the response to Covid-19 might be different: Many companies are actually cutting pay, providing a glimmer of hope that the economy will rebound faster than usual.