Pay cuts - a shortsighted strategy

After a relatively long boom period the downturn came as a shock to most of us. It's brought home the sense of a real crisis to many employees and businesses. The crisis means unemployment has become a real threat to many workers, and many are prepared to stretch far to keep their jobs. 

More than half of Danish workers are willing to accept pay cuts of around 5 to 10 percent, and this is a new trend. Danish cabin crew with the Scandinavian airline SAS have accepted a 7 percent pay cut on top of the 3.5 percent they agreed to earlier, in order to save their jobs. I believe this change in attitude is based on a fear of unemployment combined with low unemployment benefits. 

Many used to regard unemployment benefits as a sufficient safety net in combination with an active employment policy and a system for further training. In Denmark the benefits now cover on average no more than 55 to 60 percent of your salary, and this feeds an uncertainty among many workers at risk of loosing their job. What's more, the boom years meant training for unemployed people became less of a priority. Today's Danish employment policy is far from geared towards helping unemployed people gain the skills needed to find jobs where they're still to be found. If we fail to address this, we could be facing serious problems recruiting people when employment picks up again. The country could then suffer a skills shortage, as job seekers will lack the training to do the jobs which become available.

But cutting pay doesn't necessarily solve a company's problems and could turn out to be a bottomless pool.

Pay cuts is a cost-cutting tool for many businesses. I can well understand the choice of the individual worker, but pay cuts do not represent a good, long-term strategy if there is no adjustment to the company's production. At the end of the current crisis, the labour market will emerge changed. 

Some businesses will survive, others won't. History is not rich in examples of companies saving themselves by implementing pay cuts. I fear pay cuts will result in loss of employee motivation, which again will weaken productivity and increase the crisis a company is already in.

There are, of course, businesses that offer well above average pay and conditions, and for whom it makes sense to level with the competition in a time of crisis. But I feel pay cuts are generally not the solution if the problem is lack of demand. You should stimulate demand by implementing active employment policies and by public investment in research, infrastructure, education and innovation.