Why Firms Avoid Cutting Wages: Survey Evidence from European Firms

National Bank of Belgium Working Paper No. 251

39 Pages Posted: 21 Dec 2013

See all articles by Philip Du Caju

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 Room

Bank of Estonia

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2013

Abstract

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 cuts.

Keywords: labour costs, wage rigidity, firm survey, wage cuts, European Union

JEL Classification: J30, J32, J33, J51, C81, P5

Suggested Citation

Du Caju, Philip and Kosma, Theodora and Lawless, Martina and Messina, Julián and Room, Tairi, Why Firms Avoid Cutting Wages: Survey Evidence from European Firms (December 19, 2013). National Bank of Belgium Working Paper No. 251, Available at SSRN: https://ssrn.com/abstract=2369836 or http://dx.doi.org/10.2139/ssrn.2369836

Philip Du Caju (Contact Author)

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 Room

Bank of Estonia ( email )

Estonia Building 13
15095 Tallinn
Estonia

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