Do Employees Regard Wage Cuts and Layoffs as Opportunistic?

Authors:
John David Simpson
Working Paper:
185

This paper examines whether workers are less willing to accept defined benefit pension plans (a type of implicit contract) from firms that have reduced either worker compensation or employment. Worker reluctance to accept defined benefit pension plans from these firms suggests that workers view reductions in compensation and reductions in employment as a breach of an implicit contract. Therefore, a switch from a defined benefit (DB) to a defined contribution (DC) plan or to no pension plan can be viewed as a proxy for worker distrust of the firm. This paper finds that both reductions in employment and reductions in wages significantly increase the probability of a DB-DC or DB-no plan switch. This suggests that workers view layoffs and wage reductions as a breach of an implicit contract.