Cutting wages is hard to do

what goes up is tough to get downPeter Gelb says New York’s Metropolitan Opera will go broke within the next few years without wage cuts. The BBC reports:

He proposed cutting 16% of its $200m (£119m) labour costs by changing work rules for the orchestra and chorus.

Gelb also defended spending $169,000 (£100,000) on a poppy field stage set for the opera Prince Igor.

Unions have already threatened strike action over the proposed pay cuts, which are up for debate before the players’ current contracts expire at the end of July.

“What’s at stake, ultimately, is the future of the Met Opera,” Gelb told Music Matters’ presenter, Tom Service.

“I’m just trying to address this problem a few steps before the edge of the precipice instead of waiting until we are actually on the precipice.”

He continued: “Even if I was the worst manager in the world, if two thirds of the cost structure is going to the unions, clearly that’s an area that has to be cut.”

He hopes to change rules that currently guarantee members of the orchestra and chorus get paid for at least four performances a week, when they usually perform less.

In an earlier post I claimed that the high expenses at prestigious nonprofit arts organizations were driven by their revenues; companies will only consider $169,000 poppy fields if there is enough revenue to make it possible. So, if revenues begin to fall, expenses must fall as well. But rising and falling expenses are not symmetric: it is easier for wages to go up than to come down. Why?

Economists have long noted (going back at least to John Maynard Keynes) that wages tend to be “sticky” when it comes to a decline, although not in an increase. We could attribute this to workers becoming accustomed to the lifestyles and expenses from a higher salary, and who would have difficulty scaling back. But there is something more to it.

In some circumstances, we are more accepting of cuts in pay. A broad-based increase in income tax rates results in an effective cut to the after-tax wage. Some might grumble a bit if that happens, but it doesn’t tend to bring us out to the barricades. Likewise, a devaluation in the currency in which we are paid is like a real wage cut; if I am paid in Canadian dollars, and the Canadian dollar’s value falls in foreign exchange markets, I am poorer. But, again, while their might be grumbling that goods have become more expensive relative to wages, people are for the most part accepting of this. What each of these two examples has in common is that with a tax increase, or a devaluation, everybody’s pay falls. Your neighbors are in the same boat. And that is very different from a pay cut at your firm, and your firm alone, since in that case you will have fallen in pay relative to those around you. And that does tend to get people agitated.

So, when wages rise within an organization because revenue growth is strong, and workers are organized enough to make sure they capture a share of the benefits from those increasing revenues, the manager needs to keep in mind that these raises will be very tough to reverse if revenues begin to fall. And note that to this point I haven’t mentioned unions; this is the situation whether or not there is collective bargaining.

I don’t like heights to begin with, but I have always found it easier to climb up a high ladder than to climb back down. Wages are like that.

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