Job Cut vs. Pay cut: The Prudent Choice

Job Cut vs. Pay Cut: The Prudent Choice[1]
: D. C. Pathak[2]

The world is facing a grave financial crisis these days. Varied responses/opinions have come to deal with this crisis; from extensive bailout plans to job cuts and pay cuts. As this crisis has put a question on the credibility of all economic thinking[i], debate is on over its various implications and the future course of action. Like other countries, India is not immune to this crisis. A decision to cut jobs by the Jet Airways due to the present financial crisis fueled a debate. Though the decision has been reversed, the debate is yet to settle. An issue has come up with Jet’s employees accepting a pay cut in lieu of job cut about the reparability of the two. An article at the website ‘Knowledge@Wharton’ presents varied view on the issue of job cut vs. pay cut in details. The article mainly contemplates the issue from HR point of view. The present article has tried to deal with the economic aspect of the issue.

Before proceeding on to make arguments, it would be better to discuss the assumptions behind the arguments.
Workers from one sector/industry can’t be employed in some other sector/industry due to specialized skills needed. It means, inter-sector/industry mobility of labour is zero.
Job cut implies a zero income, i.e., .
Pay cut implies that the new income stream would be less than the original income stream but would be significantly greater than the . It implies that
4. All workers have some accumulated savings.
5. Savings are a function of income , i.e.,
6. All savings are invested.

Suppose a firm was paying its employees Rs. 100/month. Now it wants to downsize by Rs. 1000. It has two choices: either it go for a job cut of 10 employees or it can go far a pay cut of say, 100 employees, cutting Rs. 10 from each employee’s salary. Other firms in the industry would face the similar choice. Though both options look alike but they affect the employee and the economy differently. In the first case of job cut, the income streams accruing to employees would become zero. So, now they will have recourse to only there accumulated savings. Though number wise the job cut would seem insignificant, but when one considers the hefty pay packets these employees get, it would be quite significant financially. Being a rational consumer, the out-of-job employees would cut his expenditures drastically as he would not want to finish up his all savings. Cut in expenditures would lead to fall in demand. Since the supply would take some time to fall, the result would be a general oversupply of goods leading to a price fall. Falling prices would create a panic among the producers and they would reduce their inventories and may also resort to job cuts if they feel the low demand condition to continue. This situation if left to feed on itself unchecked, would lead to depression in the economy. Also the out-of-job people would not make any saving so that part of money supply would reduce which depend on savings by these people. A fall is money supply means a high rate of interest. A high rate of interest would lead to a fall in investment decision. This chain of events would again lead to depression in the economy.
One can safely assume that the people with pay cut would expect even the worst and therefore wouldn’t draw heavily on their accumulated savings. They will, instead, go far a reduction in consumption expenditure. Even this reduction should be less than that for the out-of-job people. The people with pay cuts would also reduce or in some extreme cases stop making new savings. This would reduce the money supply but by much less extent than for the case of out-of-job people. A comparatively less reduction in money supply implies that the increase in the rate of interest would be comparatively less in case of pay cut. Thus, if all the firms in the economy opt for a general pay cut rather than a general job cut, the chances of the economy falling in grip of depression would reduce. As the employees can’t move across industries owing to specialized skills requirements, a general job cut would create an unused skill-pool. A drawback of specialization is that one loses touch with other common tasks which fall outside the gambit of this sector/industry. Such employees feel the punch the hardest as they found it very hard to get and do well in some other sector/industry. Though they're good at what they know, they're worthless in such a situation, a kind of paradox. Thus, from an economic point of view, a general pay cut is preferable to a general job cut. An across the board pay cut would even motivate the employees by instilling a feeling of oneness and kinship in the firm. This may work miracles as the collective will can attain anything.
Apart from above economic arguments, there are also some other arguments[ii] against job cut. To list a few,
1. As rightly pointed out by an article in Knowledge at Wharton by title 'Job Cut vs. Pay Cut: In a Slowing Economy, What is Better for India?'[iii], losing a job creates an image of incompetence in the mind of family and friends. Even more dangerous is that it would lower the self-esteem of an individual and that can lead to further decline/irreparable damage to his/her self-image and efficiency.
Losing a lucrative job would plunge the person in a quagmire of depression, affecting the mental health of the person and his family/friends.
As an extreme step, the employee may commit suicide also. News about suicide by people due to loss in the stock-market has come recently.




[1] The motivation for this write up came from Roberta Shell’s article in ‘Knowledge@Wharton’.
[2] The author is a Senior Research Fellow at the OKD Institute of Social Change and Development, Guwahati (India).
[i] See “Economics needs a scientific revolution”, an essay by Jean-Philippe Bouchaud in NATURE, Vol 455, 30 October 2008. Also see the blog posting: http://misplacedemphasis.blogspot.com/2008/11/economics-needs-scientific-revolution.html

[ii] Can be assessed at http://durgeshonomics.blogspot.com/2008/11/should-we-cut-jobs-or-downsize-pay.html
[iii] This article can assessed at http://knowledge.wharton.upenn.edu/article.cfm?articleid=4333 and presents varied opinions by several persons.

Who saved us...?

Ever wondered what/who saved India from the global financial turmoil? Our Prime Minister and company would say, it was our strict regulation on banking/financial system. Well said but what were these restriction doing when some people played spoil-sport with our financial system some years ago via share-scams...!
Sorry to say but I've entirely different thinking on the rather safe plight of India in the global financial crisis. India has a vast non-monetaized sector and a staggering army of poor or not-so-rich who could invest in our miraculous innovations in financial sector. How can those who barely meet to square meals, should invest in these. And it was this fact that saved India. If Indian would also have large investment in financial market, they would also have been facing the same crisis even more severely. This is a naked truth whether anyone would like to accept it or not. So, dear fellow economists and dear PM (alongwith your hugh army of think-tanks) your regulation has not saved us but government's failure to erradicate poverty has. Doesn't feel good...sorry, can't help it.

Choosing Among Unequals...! A Solution for Vishisht BTC

In Uttar Pradesh, a new tradition has been started of selecting B.Ed degree holders for a job in Primary Schools and it has been named "Vishisht BTC". Applying their own logic, the ruling governments use variuos criterion to select the candidates. The basic problem is that they have to choose candidates on the basis of merit of their marks in various exams. Now, it is well-established fact that marking is not similar in all universities/colleges. So for a same exam, there can be much inter-university as well as intra-university variation in marks given to students. The point is that student from a college/university where marking is very strict, would always lag behind in the merit and so would have very sparse chances of getting the job. This would lead to adverse selection.
Normalization of scores can be an elegant solution to this problem. For more detailed analysis of the problem, one can refer to the following link:
http://works.bepress.com/durgesh_chandra_pathak/8/

Development...really...!

I was enjoying a stroll after lunch when I visited him in Shillong. I was enjoying the beauty of nature. I told him, appreciating in my heart, that the only here could I see real hill-type house...houses with sloping roofs. I missed them in Guwahati, which has become like any other metro, boasting of its glittering malls and other hallmarks of prosperity. He told me, smiling, that when these people would earn some money, they would go for the renovation of these houses and then you would not find your poetic kind of houses with sloping roof. He showed me some newly constructed houses for proof. They were exactly alike houses at normal towns. He quipped that these people would love to make houses of modern type as a symbol of their development. A sudden rush of gloom engulfed me far I was not sure that the transition of people from old-style houses to modern ones would be a development or not. It is prosperity accepted but losing ones identity does not appeal me. I don't believe that it is 'development'. I told my friend that I'm constantly in argument, since my College days, with people who see these changes as 'development'. Is it necessary that 'development' must entail losing ones identity, values...! The crisis of values which our society is facing is the outcome of the same 'development'-philosophy. But then I stopped as I realised who am I to decide what constitutes people's identity...!

Should we cut jobs or downsize the pay-packets...?

Firing someone from job owing to the recent financial crisis would have several undesired aftereffects. To list a few of them,

1. As rightly pointed out by an article in Knowledge at Wharton by title 'Job Cut vs. Pay Cut: In a Slowing Economy, What is Better for India?', losing a job creates an image of incompetence in the mind of family and friends. Even more dangerous is that it would lower the self-esteem of an individual and that can lead to further decline/irreparable damage to his/her self-image and efficiency.
2. Losing a lucrative job would plunge the person in a quagmire of depression, affecting the mental health of the person and his family/friends.
3. As an extreme step, the employee may commit suicide also. Several news about suicide by people due to loss in the stock-market has come recently.
4. Now the economic aspect: losing a job means losing the purchasing power which means low level of effective demand. This would translate into a glut in the economy and ultimately will deepen the depression.
5. When employees from a particular industry/sector lose job at a large scale, it creates a problem of unused skill. These employees have specialised a particular job. A drawback of specialisation is that one loses touch with other common tasks which fall outside the gambit of this sector/industry. Such employee feel the punch the hardest as they found it very hard to get and do well in some other sector/industry. Though they're good at what they know, they're worthless in such a situation, a kind of paradox.

Bravo...!

I've been observing the public reaction since the Oct. 30 blasts. I'm mesmerised by the way people of Assam are reacting. The solidarity they're showing to the blast-victims, their angst towards the blasts and their protest of the politicians who always try to use such situations for getting a political mileage, is worth praising. The public has shown, both to the terror-mongers and to the politicians, that they can't divided on lines of caste and religion. In fact, the grief has cemented the souls together. Bravo! the brave people of Assam.

p.s.: One can read an article over Assam-blasts on my another blog:

http://durgesh-the-dreamer.blogspot.com/2008/11/blog-post.html

Demi-Gods...!

Those of you who’ve read the ‘Kitne Pakistan’ by late kamleshwar would be musing over the secessionist cries India is facing. Which part of the country is left untouched with the venom of regionalism, secessionism. It was and still there is in Kashmir, it was in Panjab, it was in North-East and now the latest to join the fray had been the Maharashtra, thanks to its self-proclaimed messiah. He is standing tall (sic) for the cause of the Marathi people; at least he and some of others like him think so. He can challenge the Government of India: catch me and the Maharashtra would burn…oho! What a great show of power. And then his intelligent followers just missed to ask, “But why should Maharashtra burn? Isn’t it the Marathi people who would also suffer…!” But who cares. Messiah ji! You’re really great. You can make the ‘star of the millennium’ bend on his knuckles, you would justify the beating of youth from Bihar and UP when they go to Mumbai for appearing in exams; who cares if one of them died and was the sole hope of his family…! One question Messiah ji, have you ever appeared in any competitive exam to get a job…oho, don’t frown please, let me ask another question: are you educated enough to sit in a competitive exam. If yes, then please do come to any part of India for appearing in an exam and we would treat you with utmost honour not because we’re afraid of you but because we Indian still believe in ‘atithi devo bhav’. And you know why we’re not afraid of your appearing in a competitive exam…very simple, we believe that the talent should be rewarded. Those of you who have been born with silver spoon in mouth can't understand the hardship with which a middle class family arranges for the staudy of its wards and waht hopes they pin on them.
These youths should have been even beaten more, anyone who speaks against you must be crushed. How dare they forget that you’re ‘Maratha Bhagya-Vidhata’. You can use vituperative language against any one. You can spit fire against the Film Actors, claiming that they have earned all their fame and wealth in Mumbai. Should I remind you that Mumbai would have benefited more economically by the work of these actors. Don’t believe me…go to Economics department of Mumbai university and some professor would explain it.
If you’re really well-wisher of marathi people, you wouldn’t have created all this mayhem on ‘outsiders’ coming to Maharashtra and getting jobs. Doing so is simply reducing the competition in the job market and everyone knows what happens when competition is removed from a market. You’ll be left with lesser choice; jobs wouldn’t go to the most efficient but to some one who is less deserving. It is very easy to guess that the overall economic efficiency would be affected adversely and the actual output of the state would be less than its potential output. So, your ‘save Mumbai’ campaign would, in fact, go hurting Mumbai’s interest.
Ok, you may accuse that we’re using economic jargons to frame you. So, you must have gone through, or at least heard of the Constitution of India. You would also be aware that it guarantees every Indian a freedom to live and get job at any part of the country. Now, don’t tell me that you’re an extra-constitutional being…!
I appeal to all the Maharashtrians not to fall pray to such secessionist campaigns. Ask the Messiah what he has actually in his mind. It is not the interest of the Maharashtra-people but a burning desire to carve a niche for him in Maharashtra politics, a la-Thakre mode. He is pursuing the path to political power and finally to economic power. He knows it very well, like all other politicians, that in India, people can be fooled in name of religion, regions etc. damn easily and he is simply playing the region-card.
There is still time. Indian government should take stern actions to check all such voices lest every state would start behaving in the same manner and the national interest, economic as well as political, would be seriously undermined.

He Raam...!

I'm watching, with grief, what is happening in the surrounding...blasts rocked the city, people lay crippled, dead; blood and gore every where...I was shocked with news as I visited the place Ganeshguri only the previous evening to buy some medicines. It was my first visit to the place as I've shifted to Guwahati only on Oct.22, 2008. I was aghast with the news not because what would have happened if the blasts would have took place on the evening I went there but by the thought that the place whose beauty I 'd adored only few hours ago, was now painted with warm blood spilled out of crying humanity. All the beautiful faces reeled before my eyes whom I'd adored the previous evening seeing their jest for life...no way to know who among them is still alive...!
Why...the only thing came to me was a big, painful "why": why this has happened...I don't care, unlike the politicians of my country who are busy blaming each-other for it, who has done it...what is troubling me is why they have done this...! Whom they're trying to kill...their own countrymen...oh Humanity! I'm sorry for your slow demise...Are we reaching the end of the world in Elliot's way...not with a bang, but in a whimper...
Only person whom I could think of this time was Gandhi ji and I was surprised why I'm thinking of him...I'm not blind admirer of him though I liked several aspects of his struggle. My heart gave me the answer: we're moving away from his path; every struggle, every oppose must have a moral heart behind it otherwise it would only play havoc the way we are witnessing all this mayhem...!
Sorry to start this blog on a sad note, but there was no way out...!
There are some inescapable points worthy of an inquiry from an economist’s view in all such mayhems and also in the non-violence philosophy of Gandhi. It is often baffling why the politicians don’t show the determination to deal with such acts of terrorism. They often claim that we don’t have enough resources to beef up the intelligence and security. To me it is more a matter of ‘intention’ than of ‘scarcity of means’. I feel the politicians don’t have any intention of preventing these events as strict measures taken would displease some groups and that would affect adversely their ‘vote bank’. The political power, something which they want to grab at all cost, to too priceless to them to be squandered for curbing such extremist groups. They don’t want the political power for its own sake but for the economic power it brings with it. Bare political power would be worth less and I think that if there would be some such provision that those with political power wouldn’t have any control over the economic power and its agents then very few people (only those driven by power and prestige motive solely) would opt for the political power. The political power in country opens the floodgates of opportunities: of corruption, of nepotism, to name a few.
The politicians are aware of the fact that the people with separatist/extremist ideology don’t have any affection for them. They would vote for a party/politician who would seem to protect their interest the most as they don’t have their own political clout to such an extent to come to power on their own alone. The politician knows this and he is also aware of the fact that these votes could be decisive in election so he would not want to take any stern action which would make these votes shift away from him. Losing an election is losing an opportunity for corruption, nepotism and making easy money, something which the politician don’t want to forgo. As far as the victims of such violent/extremist activities are concerned, they don’t have much choice to make: all the politicians are of made from the same cast. Therefore, it is this access to economic power which detains the politicians to take stern actions and deal with extremist ideologies.
Now, let’s have a look at the Gandhian philosophy and the economics behind it. Adhering to non-violence reduces the economic losses to a minimum. Both, the violent events by extremists and the following protest of it by irate masses causes economic losses. Whether it is an immediate and direct loss in form of loss of public property due to blasts etc. or it is not-so-direct economic loss ensuing form the ‘band’ organized in protest of violent events. Some times protest events themselves turn violent and incur huge loss of public/private property, an example can be found in the violent protest by public after the October 30 blasts in Guwahati. This loss to public property would cast the public itself as they have lost some public goods which were created from the money which they paid as taxes. Also, this loss would drag the economy a bit, howsoever small this drag be. So, ultimately the loser is the public itself and not these politicians. The beauty of the Gandhian philosophy is that it leads to no loss of public/private property.