Nominal wage rigidity in Europe: estimates and institutional causes
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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