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Why firms avoid cutting wages: survey evidence from European firms

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


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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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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