DOWNWARD NOMINAL AND REAL WAGE RIGIDITY: SURVEY EVIDENCE FROM EUROPEAN FIRMS

Jan Babecký

Czech National Bank

 Philip Du Caju

National Bank of Belgium

Theodora Kosma

Bank of Greece

 Martina Lawless

Central Bank and Financial Services Authority of Ireland

 Julián Messina

World Bank and  University of Girona

 Tairi Rõõm

Bank of Estonia

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 codes: J30, J31, J32, C81, P5.

Acknowledgments: The work was conducted within the framework of the Wage Dynamics Network coordinated by the European Central Bank. We thank for helpful comments Giuseppe Bertola, Aurelijus Dabušinskas, Gabriel Fagan, Kamil Galuščák, Jaromír Gottwald, Jan Hošek, Juan Jimeno, Ana Lamo, Frank Smets, Kateřina Šmídková, Jarkko Turunen, the participants of the WDN meetings and an anonymous referee of the ECB WP Series. The opinions expressed in this paper are solely those of the authors and do not necessarily reflect the views of their respective institutions.

Correspondence:

Theodora Kosma

Economic Research Department,

Bank of Greece, 21 E. Venizelos Ave.,

10250 Athens, Greece

Tel.:+30-210-320 2642

Email: tkosma@bankofgreece.gr