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Downward Nominal and Real Wage Rigidity: Survey Evidence from European Firms

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  • Babecký, Jan
  • Du Caju, Philip
  • Kosma, Theodora
  • Lawless, Martina
  • Messina, Julián
  • Rõõm, Tairi

Abstract

It has been well established that the wages of individual workers react little, especially downwards, to shocks that hit their employer. This paper presents new evidence from a unique survey of firms across Europe on the prevalence of downward wage rigidity in both real and nominal terms. We analyse which firm-level and institutional factors are associated with wage rigidity. Our results indicate that it is related to workforce composition at the establishment level in a manner that is consistent with related theoretical models (e.g. efficiency wage theory, insider-outsider theory). We also find that wage rigidity depends on the labour market institutional environment. Collective bargaining coverage is positively related with downward real wage rigidity, measured on the basis of wage indexation. Downward nominal wage rigidity is positively associated with the extent of permanent contracts and this effect is stronger in countries with stricter employment protection regulations. JEL Classification: J30, J31, J32, C81, P5

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Paper provided by European Central Bank in its series Working Paper Series with number 1105.

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Date of creation: Nov 2009
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Handle: RePEc:ecb:ecbwps:20091105

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Keywords: Downward nominal wage rigidity; Downward real wage rigidity; European Union; survey data; wage indexation;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Are wages really that rigid?
    by Economic Logician in Economic Logic on 2009-12-28 15:42:00
  2. La indiciación salarial a debate
    by Samuel Bentolila in Nada Es Gratis on 2011-02-15 07:35:37
  3. Kan löner sänkas?
    by nonicoclolasos in Nonicoclolasos on 2010-01-14 13:29:51
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