[Related to the Apply the Concept on page 448] An article
in the Economist discussing the 2007–2009 recession stated
that “employers found it difficult to reduce the cash value
of the wages paid to their staff. (Foisting a pay cut on your
entire workforce hardly boosts morale.)”
a. During a recession, couldn’t firms reduce their labor
costs by the same, or possibly more, if they laid off
fewer workers while cutting wages? Why did few
firms use this approach?
b. What does the article mean by firms reducing the
“cash value” of workers’ wages? Is it possible for firms
to reduce workers’ wages over time without reducing
their cash value? Briefly explain