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Why firms avoid cutting wages: survey evidence from European firms

Author

Listed:
  • Philip Du Caju

    (National Bank of Belgium)

  • Theodora Kosma

    (Bank of Greece)

  • Martina Lawless

    (Central Bank of Ireland)

  • Julian Messina

    (World Bank and Universitat de Girona)

  • Tairi Room

    (Eesti Pank)

Abstract

The rarity with which firms reduce nominal wages has been frequently observed, even in the face of considerable negative economic shocks. This paper uses a unique survey of fourteen European countries to ask firms directly about the incidence of wage cuts and to assess the relevance of a range of potential reasons for why they avoid cutting wages. Concerns about the retention of productive staff and a lowering of morale and effort were reported as key reasons for downward wage rigidity across all countries and firm types. Restrictions created by collective bargaining were found to be an important consideration for firms in euro area countries but were one of the lowest ranked obstacles in non-euro area countries. The paper examines how firm characteristics and collective bargaining institutions affect the relevance of each of the common explanations put forward for the infrequency of wage cuts

Suggested Citation

  • Philip Du Caju & Theodora Kosma & Martina Lawless & Julian Messina & Tairi Room, 2014. "Why firms avoid cutting wages: survey evidence from European firms," Working Papers 173, Bank of Greece.
    • Handle: RePEc:bog:wpaper:173
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    References listed on IDEAS

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    More about this item

    Keywords

    labour costs; wage rigidity; firm survey; wage cuts; European Union;
    All these keywords.

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • P5 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems

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