Friday, October 19, 2007

Joe Torre and the Stickiness of Wages

Joe Torre's decision to turn down the NY Yankees' offer of $5 million to manage the team in 2008 could be read as simply a manifestation of the stickiness of wages. In good times, salaries go up, but when bad times hit, firms have difficulty lowering salaries, at least where employees have bargaining power. That's right, I think, but the episode tells us something important about what makes wages sticky in general.

First, the facts (for non-fans of baseball and/or the Yankees): Torre has been the manager of the Yankees since 1996. During that time, the Yankees were the only team to reach the playoffs in every season. They won 4 World Series titles under Torre, although none since 2000, and the Yankees have been eliminated in the first round of the playoffs in each of the last 3 seasons. Over the last 3 years, Torre received $19.2 million, easily making him the highest paid manager in professional baseball. However, before the Yankees were eliminated by the Cleveland Indians earlier this month, Yankees principal owner George Steinbrenner said that losing the divisional series to the Indians would mean that Torre would not be re-hired. Nonetheless, after two weeks of silence, the Yankees offered Torre a one-year deal for $5 million, with an extra $3 million if the Yankees reached the World Series in 2008 (plus an extra year at $8 million guaranteed in that event). Even without the bonus, Torre would have remained the highest paid manager in baseball by a wide margin.

Why did Torre decline? I doubt that Torre simply had gotten used to earning $7.5 million and thus felt that he couldn't get by on a "mere" $5 million. Among other things, it's hard to imagine another team offering him more. Instead, it's reasonably clear to me---and to most other Yankees fans, I suspect---that Torre found the pay cut, and the incentives, insulting. To suggest that he needs the lure of an extra $3 million to reach the World Series is to say that Torre's professionalism and competitive drive do not already motivate him to try as hard as he can to capture a title.

No doubt George Steinbrenner's motives will be closely analyzed, and I suspect many will conclude that the offer was structured as it was with the deliberate intention of insulting Torre, so that he would turn it down, leaving Steinbrenner free to say that he didn't fire Torre. Whether this ruse---if that is what it was---succeeds, remains to be seen.

But here I want to suggest another inference we might draw from this episode. I think we can generalize to the stickiness of wages in other contexts. Of course, to someone earning a less princely sum, the prospect of a 33% pay cut (Torre earned $7.5 million in 2007) is objectionable principally because he or she relies on the money. Yet I don't think that purchasing power alone accounts for the stickiness of wages in other contexts. Rather, when an employer proposes to cut workers' salaries, workers feel devalued, in just the way that Torre did. Employees may reluctantly accept the cut, as unions sometimes do, if the alternative is job loss, especially if the employer can make a plausible claim that cost-cutting is essential to the firm's continued existence. But absent such an external justification (which, by the way, seems to be clearly absent in the case of the Yankees and Torre), wage cuts are generally regarded as insulting.

Posted by Mike Dorf