Why Firms Avoid Cutting Wages: Survey Evidence from European Firms

37 Pages Posted: 20 Apr 2016

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 Rõõm

Bank of Estonia

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Date Written: July 1, 2014

Abstract

Firms very rarely cut nominal wages, 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 the firms avoid cutting wages. 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. 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 Western European (EU-15) countries but were one of the lowest ranked obstacles in the new EU member states in Central and Eastern Europe.

Keywords: Labor Management and Relations, Labor Markets, Rural Labor Markets

Suggested Citation

Du Caju, Philip and Kosma, Theodora and Lawless, Martina and Messina, Julián and Rõõm, Tairi, Why Firms Avoid Cutting Wages: Survey Evidence from European Firms (July 1, 2014). World Bank Policy Research Working Paper No. 6976. Available at SSRN: https://ssrn.com/abstract=2470236

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 Rõõm

Bank of Estonia ( email )

Estonia Building 13
15095 Tallinn
Estonia

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