Why Firms Avoid Cutting Wages:
Survey Evidence from European Firms
Philip Du Caju
National Bank of Belgium
Bank of Greece
Central Bank of Ireland
World Bank and Universitat de Girona
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.
JEL Codes: J30, J32, J33, J51, C81, P5
Keywords: labour costs, wage rigidity, firm survey, wage cuts, European Union
Acknowledgements: The work was conducted within the framework of the Wage Dynamics Network coordinated by the European Central Bank. We would like to thank all the participants of the meetings of the Wage Dynamics Network for their helpful comments and work on compiling the country data. We also thank Heather Gibson, the participants of the Irish Economic Association meeting and a Bank of Greece seminar for their comments. The opinions expressed in this paper are solely those of the authors and do not necessarily reflect the views of their institutions.
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