The argument points out that if an employer reacts to poor business conditions by reducing pay for all workers, then the best workers, with the best employment alternatives at other firms, are the most likely to leave and the least-attractive workers, with fewer employment alternatives, are more likely to stay.
efficiency wage theory
adverse selection of wage cuts
equilibrium wage theory
employer wage theory

ADVERSE SELECTION OF WAGE CUTS

Explanation:

This phenomenon refers to situational where the best employees leave a job because they feel their productivity is higher than they are bring paid for. Conversely, the lesser attractive employees stay because they are being paid equitably or even more than their productivity.

The effect of this can be even more reduced productivity.

For example,

Parrain Inc in response to low productivity drops salaries to $10 an hour for the manufacturing of pencils. Each employee is required to make 30 pencils an hour. Some employees make 40 pencils an hour and feel they are not being well compensated and leave.

This will drop the amount of pencils Parrain Inc is producing. They respond by reducing salaries again which now prompts those that were making 35 pencils an hour to leave. Productivity drops again and the cycle repeats.

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