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Why firms avoid cutting wages: survey evidence from European firms

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  • Philip Du Caju
  • Theodora Kosma
  • Martina Lawless
  • Tairi Rõõm

    ()

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 cut

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Bibliographic Info

Paper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number wp2013-2.

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Date of creation: 24 May 2013
Date of revision: 24 May 2013
Handle: RePEc:eea:boewps:wp2013-2

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Related research

Keywords: labour costs; wage rigidity; firm survey; wage cuts; European Union;

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  1. Ernst Fehr & Lorenz Goette & Christian Zehnder, 2008. "A behavioral account of the labor market: the role of fairness concerns," IEW - Working Papers 394, Institute for Empirical Research in Economics - University of Zurich.
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  4. Julián Messina & Philip Du Caju & Cláudia Filipa Duarte & Niels Lynggård Hansen & Mario Izquierdo, 2010. "The incidence of nominal and real wage rigidity: an individual-based sectoral approach," Banco de Espa�a Working Papers 1022, Banco de Espa�a.
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  26. repec:iab:iabjlr:v:45:i:1:p:7-22 is not listed on IDEAS
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Why firms do not like cutting wages
    by Economic Logician in Economic Logic on 2014-01-23 15:22:00
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Cited by:
  1. Andrea Bassanini, 2011. "Aggregate Earnings and Macroeconomic Shocks: The Role of Labour Market Policies and Institutions," OECD Social, Employment and Migration Working Papers 123, OECD Publishing.
  2. Aedin Doris & Donal O'Neill & Olive Sweetman, 2013. "Wage Flexibility and the Great Recession: The Response of the Irish Labour Market," Economics, Finance and Accounting Department Working Paper Series n244-13.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  3. Bergin, Adele & Kelly, Elish & McGuinness, Seamus, 2012. "Explaining Changes in Earnings and Labour Costs During the Recession," Papers EC9, Economic and Social Research Institute (ESRI).

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