Lessons from the Labour Market

Suppose you manage a firm with 100 employees making $800 each per week for a total payroll of $80,000. As a result of the recession you must reduce payroll expenses by 10%. There are two ways to do this: layoff 10 employees, or cut everybody's pay by $80 a week. Both of these options will cause employee discontent so how do you decide which option to choose. Let's put it to vote. What do you think the results of the vote will be? The 10% of the employees that would likely face a layoff will vote in favour of the pay cut while the 90% of employees that would likely keep their jobs would go for the layoffs. By simple democracy 10% of people get laid off. This is one application of the insider-outsider theorem.

Michael Bloomberg, the mayor of New York, has recently announced that teachers in New York City must forgo their pay increase to prevent the loss of 4,400 jobs. (Click here for the article). Apparently Michael Mulgrew, president of the teachers union, is not impressed. The New York school board employs approximately 80,000 teachers. How you think the union members will vote if given the choice between a pay freeze and 4,400 layoffs?