Well, that brings me to a different question. How much a difference expectations make, especially when it comes to bad scenario?

Say, you have a built in mechanism where salaries are tied to GDP growth, such that in a bad year you know the salaries would be adjusted downwards (and by what proportion). How differently would employees react, compared to a normal circumstance?

So, probably it would be best to cut down the earnings by 10% but with the promise to pay this back when the crisis has passed (if the employee is still in the company). So, you cut down the salaries now by 10%, but due to the worksmen want the 10%, they’ll stay. In this time period, you can still fire some employees you don’t need due to they’re unproductivity…

But a big problem in your game theory analysis is imho that you only calculate direct costs. How about saving in computer licences etc. due to lesser employees. But there are different other impacts (I know from Switzerland), f.e. we have to offer some social plan to the people we fire or retire earlier than 65 and stuff like that.

Purely thinking game theory here, they are all playing a complex ultimatum game.

Players:

The employee: he/she is the decider the one who chooses whether or not to accept the deal.
The company: is the proposer the one who chooses what to offer the employee (position and payment)

Rules:

-There are more than one employee and more than one company.
-Companies gives “offer” to employee
-Companies can change offers so long as employee hasn’t said yes or no
-Employee then accepts or declines
-One round is played for each game (between one company and one employee)
-There are multiple games with different players
-Employee can only accept one offer
-The company doesn’t know how many other companies have made an offer to the employee that are still valid (could be none, could be multiple, could have declined previous offers)
-The employee doesn’t know his/her worth to the company (could be hiring a bad employee because of desperation)

Game:

So every company must think how much employees do I need and how much can I offer them, while also thinking of how much other companies are offering. The employee thinks how much can I maximize my wage while insuring I receive a job.

Start: the company thinks it needs 100 employees while the budget is $100, therefore $1 per employee (this doesn’t have to be the case, one employee could receive $0.50 while another receives $1.50). The company then goes and offers a $1 wage to more than 100 employees.

Employees side: one of two things are happening: the employee is good (in terms of working) and getting plenty of offers or the employee is bad and receives only this one offer. Good employee sees there are better offers and ups the stakes or accepts. Bad employee has to decide: is the company desperate or will they decline if I up the wage.

Companies side: company wants good employee and thinks of three things, this is his last company he tried to up his wage with everyone else and is trying to do so with me, should I stay at my current offer? Will I be able to pay the rest of the employees if I up the wage? and Is it best to stay at my initial offer? The company also needs bad employee but thinks: what if I can’t get anyone else?

How does this tie into the whole pay cuts or layoffs dilemma? It does because it’s not about pay cuts or layoffs, it’s about having enough employees within the company and having them stay there.

If the amount of employees is the amount of employees in the company and the initial offer is the pay cut wage then this can be applied. If enough (what the company needs) of the employees would accept the offer then the company wins and they should do a pay cut. If people try and up the wage however there is enough still employees and budget for those employees then the company should do a lay off. If the company can’t get enough people that fit into the budget then the company loses.

I don’t know how this can be practically applied to a real life situation though.

Sorry for the long response.