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Downward nominal and real wage rigidity : Survey evidence from European firms

  • Jan Babecky

    ()

    (Czech National Bank)

  • Philip Du Caju

    ()

    (National Bank of Belgium, Research Department)

  • Theodora Kosma

    ()

    (Bank of Greece)

  • Martina Lawless

    ()

    (Central Bank and Financial Services Authority of Ireland)

  • Julian Messina

    ()

    (World Bank)

  • Tairi Room

    ()

    (Bank of Estonia)

It has been well established that the wages of individual workers react little, especially downwards, to shocks that hit their employer. 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 it 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 extent of permanent contracts and this effect is stronger in countries with stricter employment protection regulations

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Paper provided by National Bank of Belgium in its series Working Paper Research with number 182.

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Length: 60 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:nbb:reswpp:200911-23
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