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

59 Pages Posted: 14 Nov 2009

See all articles by Jan Babecký

Jan Babecký

Czech National Bank (CNB)

Philip Du Caju

National Bank of Belgium

Theodora Kosma

Bank of Greece

Martina Lawless

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department

Julian Messina

World Bank

Tairi Rõõm

Bank of Estonia

Date Written: November 12, 2009

Abstract

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.

Keywords: downward nominal wage rigidity, downward real wage rigidity, wage indexation, survey data, European Union

JEL Classification: J30, J31, J32, C81, P5

Suggested Citation

Babecky, Jan and Du Caju, Philip and Kosma, Theodora and Lawless, Martina and Messina, Julián and Rõõm, Tairi, Downward Nominal and Real Wage Rigidity: Survey Evidence from European Firms (November 12, 2009). ECB Working Paper No. 1105. Available at SSRN: https://ssrn.com/abstract=1499004

Jan Babecky (Contact Author)

Czech National Bank (CNB) ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Philip Du Caju

National Bank of Belgium ( email )

Research Department
Boulevard de Berlaimont 14
B-1000 Brussels, 1000
Belgium

Theodora Kosma

Bank of Greece ( email )

21 E. Venizelos Avenue
GR 102 50 Athens
Greece

Martina Lawless

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department ( email )

Dame Street
P.O. Box 559
Dublin 2
Ireland

Julián Messina

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Tairi Rõõm

Bank of Estonia ( email )

Estonia Building 13
15095 Tallinn
Estonia

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