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Nominal wage rigidity in Europe: estimates and institutional causes

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  • Orietta DESSY

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    Abstract

    In this paper we construct and compare different measures of nominal wage rigidity for the EU countries using the 1994-2000 waves of the European Community Household Panel. The observed distributions of nominal wage changes show a relevant percentage of nominal wage cuts and freezes across countries. When measurement error is taken into account in an econometric model of wage changes appropriately estimated, it explains almost the totality of wage cuts observed. Therefore the extent of nominal wage rigidity is quite high in Europe. Institutional causes of wage rigidity are investigated, finding an ''hump-shaped'' relationship between nominal wage flexibility and both employment protection legislation and coordination. On the other hand, an ''u-shaped'' impact of union coverage on measures of downward wage rigidity is found

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    Paper provided by Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano in its series Departmental Working Papers with number 2005-09.

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    Date of creation: 01 Jan 2005
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    Handle: RePEc:mil:wpdepa:2005-09

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    Keywords: Nominal wage rigidity; measurement error; intercountry comparison; institutions in labor markets;

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    1. Groth, Charlotta & Johansson, Asa, 2004. "Bargaining structure and nominal wage flexibility," European Economic Review, Elsevier, vol. 48(6), pages 1349-1365, December.
    2. Steinar Holden, 2004. "Wage Formation under Low Inflation," CESifo Working Paper Series 1252, CESifo Group Munich.
    3. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
    4. Stephen Nickell & Glenda Quintini, 2001. "Nominal Wage Rigidity and the Rate of Inflation," CEP Discussion Papers dp0489, Centre for Economic Performance, LSE.
    5. Steinar Holden & Fredrik Wulfsberg, 2004. "Downward Nominal Wage Rigidity in Europe," Working Paper 2004/5, Norges Bank.
    6. Steinar Holden & Fredrik Wulfsberg, 2004. "Downward Nominal Wage Rigidity in Europe (new title: The costs of price stability - downward nominal wage rigidity in Europe)," CESifo Working Paper Series 1177, CESifo Group Munich.
    7. Smith, Jennifer C, 2000. "Nominal Wage Rigidity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 110(462), pages C176-95, March.
    8. Steinar Holden, 2002. "The Costs of Price Stability - Downward Nominal Wage Rigidity in Europe," NBER Working Papers 8865, National Bureau of Economic Research, Inc.
    9. McLaughlin, Kenneth J., 1994. "Rigid wages?," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 383-414, December.
    10. Franco Peracchi, 2002. "The European Community Household Panel: A review," Empirical Economics, Springer, vol. 27(1), pages 63-90.
    11. Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, vol. 87(5), pages 993-1008, December.
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    Cited by:
    1. Du Caju, Philip & Fuss, Catherine & Wintr, Ladislav, 2007. "Downward wage rigidity for different workers and firms: an evaluation for Belgium using the IWFP procedure," Working Paper Series 0840, European Central Bank.

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