Sharing the sacrifice, minimizing the pain: Optimal wage reductions

Faced with temporary revenue shocks, employers may implement wage reductions — a common response to COVID-19 for U.S. universities. I provide a framework for optimal reductions when labor is inelastic wherein a planner balances “minimizing the pain” and “sharing the sacrifice.” I show that for a broad class of utility functions the optimal schedule includes (1) a cutoff wage below which the reduction is zero and (2) weakly progressive reduction rates above the cutoff wage. I illustrate the results using data from a large U.S. university.