3/2009 Jan Babecký, Philip Du Caju, Theodora Kosma, Martina Lawless, Julián Messina and Tairi Rõõm. Downward nominal and real wage rigidity: Survey evidence from European firms

Working Papers of Eesti Pank. No. 3/2009

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.
JEL Code: J30, J31, J32, C81, P5
Key words: downward nominal wage rigidity, downward real wage rigidity, wage indexation, survey data, European Union

*Author affiliations: Jan Babecký (Czech National Bank, jan.babecky [at] cnb.cz), Philip Du Caju (National Bank of Belgium, philip.ducaju [at] nbb.be), Theodora Kosma (Bank of Greece, tkosma [at] bankofgreece.gr), Martina Lawless (Central Bank and Financial Services Authority of Ireland, martina.lawless [at] centralbank.ie), Julián Messina (World Bank and University of Girona, jmessina [at] worldbank.org) and Tairi Rõõm (Bank of Estonia, tairi.room [at] epbe.ee). 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.

Contents

2.1. Survey design
2.2. Definitions of downward nominal and real wage rigidity
4.1. The incidence of downward nominal and real wage rigidity in the sampled countries
4.2. Labour market institutions in the sampled countries
4.3. Typology of firms according to wage rigidity
5.1. Estimation of the multinomial logit model
5.2. Estimation results - firm characteristics
5.3. Estimation results - competition
5.4. Estimation results - labour market institutions
1. Introduction
2. Survey design and definitions of wage rigidities
3. Discussion of related theories and previous empirical findings
4. Typology of firms subject to wage rigidities and institutional characteristics of the sampled countries
5. Empirical investigation of the factors related to nominal and real wage rigidity
6. Conclusions
7. References
Appendix 1. Main characteristics of the national surveys
Appendix 2. Sample characteristics
Appendix 3. Employment-adjusted sampling weight
Appendix 4. Derivation of the odds ratios for interactive variables in the multinomial logit model
Appendix 5. Questions used for the creation of the dependent variables
Appendix 6. Variable definitions
Appendix 7. Cross-country variation in the incidence of different types of union contracts
Appendix 8. Wage rigidity vs firm characteristics. Multinomial logit regressions
Appendix 9. Wage rigidity vs competition. Regressions for euro area and non-euro area countries
Appendix 10. Wage rigidity vs institutions

Downward Nominal and Real Wage Rigidity: Survey Evidence from European Firms, Working Papers of Eesti Pank No 3/2009 (PDF*)

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