Cutting Salaries or Employee Reduction

Suppose that a negative on demand affects an economy and considerably reduces the sales of a determined company. The company is losing money, sot he administrators need to find a way of cutting costs. Around seventy percent of the total costs of this company are labor costs in salaries and payments. Naturally, the labor costs are an obvious objective for the cuts.

However, the administrators of the company realize that if they reduce the salaries, the employees will become angry and work less. In fact, their productivity can become so reduced that it can make the situation worse and harm the benefits of the company: production could go down so much that the sales reduce even more then the reduction of their work costs. All this to say that, cutting salaries is, simply not a good option.

So, instead, the administrators decide to fire a big fraction of their work force to reduce labor costs. For example, if the sales went down by thirty-five or forty percent, it is possible that the company will fire thirty-five or forty percent of their work force. Nonetheless, the workers that keep their jobs get to maintain their salaries, so that they do not get mad and their productivity does not go down.

For these reasons, what can be seen during a recession is a great increase in unemployment but small cuts in the salaries. The fact that the administrators are not willing to cut the salaries has a disastrous secondary effect, which is that not reducing salaries makes it very difficult for the companies to lower the prices of the goods and services they sell.

Beginner Money Investing The Road to Recession Cutting Salaries or Employee Reduction Adding the Costs of Salaries and Benefits Going Back To Y* With or Without Government Intervention Achieving Balance with Rigid Prices