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Why Firms Avoid Cutting Wages: Survey Evidence from European Firms

Author

Listed:
  • Du Caju, Philip

    (National Bank of Belgium)

  • Kosma, Theodora

    (Bank of Greece)

  • Lawless, Martina

    (Central Bank of Ireland)

  • Messina, Julián

    (World Bank and Universitat de Girona)

  • Rõõm, Tairi

    (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

  • Du Caju, Philip & Kosma, Theodora & Lawless, Martina & Messina, Julián & Rõõm, Tairi, 2013. "Why Firms Avoid Cutting Wages: Survey Evidence from European Firms," Research Technical Papers 03/RT/13, Central Bank of Ireland.
  • Handle: RePEc:cbi:wpaper:03/rt/13
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Alexander V. Larin, 2014. "Downward Nominal Wage Rigidity: Unions’ Merit Or Firms’ Foresight?," HSE Working papers WP BRP 86/EC/2014, National Research University Higher School of Economics.
    2. Andrea Szalavetz, 2016. "Post‐crisis developments in global value chains - example of foreign investors’ Hungarian subsidiaries," IWE Working Papers 219, Institute for World Economics - Centre for Economic and Regional Studies- Hungarian Academy of Sciences.
    3. David Howden, 2013. "Separating the Wheat from the Chaff: Icelandic and Irish Policy Responses to the Banking Crisis," Economic Affairs, Wiley Blackwell, vol. 33(3), pages 348-360, October.
    4. Aedín Doris & Donal O’Neill & Olive Sweetman, 2015. "Wage flexibility and the great recession: the response of the Irish labour market," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-24, December.
    5. Fongoni, Marco & Dickson, Alex, 2015. "A Theory of Wage Setting Behavior," SIRE Discussion Papers 2015-57, Scottish Institute for Research in Economics (SIRE).
    6. Petra Marotzke & Robert Anderton & Ana Bairrao & Clémence Berson & Peter Tóth, 2016. "Wage adjustment and employment in Europe," Discussion Papers 2016-19, University of Nottingham, GEP.
    7. Boris Hirsch & Thomas Zwick, 2015. "How Selective Are Real Wage Cuts? A Micro-analysis Using Linked Employer–Employee Data," LABOUR, CEIS, vol. 29(4), pages 327-347, December.
    8. Beblavý, Miroslav & Lenaerts, Karolien & Maselli, Ilaria, 2017. "Design of a European Unemployment Benefit Scheme," CEPS Papers 12263, Centre for European Policy Studies.
    9. Peter Toth & Katarina Valkova, 2015. "Wage Rigidities and Jobless Recovery in Slovakia: New Survey Evidence," Working and Discussion Papers OP 3/2015, Research Department, National Bank of Slovakia.
    10. Messina, Julian & Gambetti, Luca, 2014. "Evolving wage cyclicality in Latin America," Policy Research Working Paper Series 6978, The World Bank.
    11. Noélie Delahaie & Coralie Perez, 2018. "Ajustements de l'emploi et des salaires : quels compromis en temps de crise ? Une analyse quantitative et qualitative à partir de l'enquête REPONSE 2010-2011," Documents de travail du Centre d'Economie de la Sorbonne 18006, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    12. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2014. "A theory of wage adjustment under loss aversion," Kiel Working Papers 1977, Kiel Institute for the World Economy (IfW).
    13. repec:ebl:ecbull:eb-17-00049 is not listed on IDEAS
    14. 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).
    15. Andrea Bassanini, 2012. "Aggregate Earnings and Macroeconomic Shocks: the Role of Labour Market Policies and Institutions," Review of Economics and Institutions, Università di Perugia, vol. 3(3).
    16. Rory O'Farrell, 2015. "Wages and Ireland’s International Competitiveness," The Economic and Social Review, Economic and Social Studies, vol. 46(3), pages 429-458.

    More about this item

    Keywords

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

    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 - Economic Systems - - Comparative Economic Systems

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