Economics

Of Course Executives Play Down the Possibility of Raises

It's a negotiating tactic, not a forecast.

Assume that everything executives say is a self-serving tactic.

Source: Caiaimage, via Getty Images

Corporate executives speaking at a Fed event recently ruled out broad pay raises for workers. Maybe that’s a hint that companies do not intend to pass along the savings from Republicans’ corporate tax cut, as many promised to doMaybe it’s evidence of automation holding down wage growth. Or maybe it just means that talk is cheap.

Americans shouldn’t take what corporate executives say at face value, for a number of reasons. First of all, there are a lot of companies in the U.S., and at any given time, some of them are doing one thing, and some of them are doing the opposite. Ford may be slashing wages even as Caterpillar raises them, or vice versa. In fact, when we look at actual wage changes for the median worker, they don’t show much variation. Raises are chugging along at around 3 percent per year:

Here's Your Raise

Three-month moving average of median wage growth

Source: Federal Reserve Bank of Atlanta

But there’s an even more fundamental reason to be skeptical of the pronouncements and promises of corporate executives.

Suppose executives say they won’t be able to hand out raises, and then they do. What negative consequences will they suffer? Workers won’t be mad. After all, they just got a surprise raise. Shareholders might be angry, but they probably pay attention only to the company’s bottom line. On the other hand, if executives promise raises and then don’t deliver, workers might be mad, and they might even become less productive because of resentment. But this is easily solved: Hand out a small bonus or one-year raise, then hold down wages more in the following years, technically fulfilling the promise to raise wages without doing do in any substantive way.

So executives have little reason not to say whatever they think is most expedient. They could do so for any number of purposes. When they promised to raise wages after a tax cut, the goal was, fairly obviously, to influence policy in their companies’ favor. When they play down the possibility of raises, as at the Dallas Fed panel, the purpose could be to set low expectations.

Setting low expectations might be an attempt to make workers more productive. Some economists argue that happiness is related to positive surprises: When you get more than you expected, you’re happier than usual. Since happier workers tend to be more productive, this means executives might be able to get more effort out of their workers by lowering their expectations. Lower worker expectations could also serve as a way for employers to gain leverage in wage negotiations, through the phenomenon known as anchoring. Promising lower wages now might be a way of lowering the actual wages that companies are forced to pay in the future.

In fact, economists have been studying the fascinating phenomenon of cheap talk for years now. Economists define cheap talk as communication that has no cost — messages that are both easy to send, and come with no consequences if they turn out to be false. Some theories explore how cheap talk by businesses could be used to raise profits, lure workers with promises of high wages, make negotiations go smoothly or facilitate a quick sale. Some surveys show that consumers will change their willingness to pay for goods and services based on cheap talk.

The upshot of this research is that just because talk is cheap doesn’t mean it’s worthless. It can reveal real information. But it’s best to always be skeptical of cheap talk. In fact, one basic result in the theory of cheap talk is that if you assume the cheap-talker will do what’s best for him and worst for you, you can often get him to reveal more of the truth.

This principle implies that workers hearing executives talk should always assume that the execs will do what’s best for the value of their own pay packages and stock options, which usually means paying workers as little as they can get away with. If executives say they’re going to raise wages, assume that even if they do, they’ll try to cancel out the raise some other way, and be on the lookout. But if they say raises aren’t coming, assume they’re trying to talk down your expectations, and don’t give up your negotiating leverage.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Noah Smith at nsmith150@bloomberg.net

    To contact the editor responsible for this story:
    Philip Gray at philipgray@bloomberg.net

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