Question

What is the name of the hypothesis that says firms lay off workers instead of cutting wages because they do not want to lose their best employees (and be left with their worst employees)?

(A) adverse selection of wage cuts
(B) decreasing returns to scale
(C) long run unemployment
(D) underemployment
(E) rational expectations

Answer 1

The adverse selection of wage cuts argument is why firms prefer layoffs to wage cuts, to avoid losing skilled staff.

Step-by-step explanation:

The hypothesis that suggests firms lay off workers instead of cutting wages to avoid losing their best employees is known as the adverse selection of wage cuts argument. This concept highlights that if wages are cut across the board, the most skilled employees, with better options elsewhere, will likely leave the company first, leaving behind those with fewer prospects.