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

  • Lawless, Martina

    (Central Bank and Financial Services Authority of Ireland)

  • Babecký, Jan

    (Czech National Bank)

  • Du Caju, Philip

    (National Bank of Belgium)

  • Kosma, Theodora

    (Bank of Greece)

  • Messina, Julián

    (World Bank)

  • Rõõm, Tairi

    (Bank of Estonia)

It has been well established that the wages of individual workers are only marginally affected, particularly downwards, by shocks to their firms. 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 downward wage rigidity 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 presence of permanent contracts and this effect is stronger in countries with stricter employment protection regulations.

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Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 11/RT/09.

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Length: 53 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:cbi:wpaper:11/rt/09
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