Downward Nominal and Real Wage Rigidity: Survey Evidence from European Firms*

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Wage Dynamics NetworkThis paper contains research conducted within the Wage Dynamics Network (WDN). The WDN is a research network consisting of economists from the European Central Bank (ECB) and the national central banks (NCBs) of the EU countries. The WDN aims at studying in depth the features and sources of wage and labour cost dynamics and their implications for monetary policy. The specific objectives of the network are: i) identifying the sources and features of wage and labour cost dynamics that are most relevant for monetary policy and ii) clarifying the relationship between wages, labour costs and prices both at the firm and macro-economic level.The refereeing process of this paper has been co-ordinated by a team composed of Gabriel Fagan (ECB, Bihan (Banque de France) and Thomas Mathä (Banque centrale du Luxembourg).form, to encourage comments and suggestions prior to final publication. The views expressed in the paper are the author's own and do not necessarily reflect those of the ESCB.The paper is released in order to make the results of WDN research generally available, in preliminary The WDN is chaired by Frank Smets (ECB). Giuseppe Bertola (Università di Torino) and Julián Messina chairperson), Philip Vermeulen (ECB), Giuseppe Bertola, Julián Messina, Jan Babecký (CNB), Hervé Le (World Bank and University of Girona) act as external consultants and Ana Lamo (ECB) as Secretary. ECB Working Paper Series No 1105November 2009 Abstract 4 Non-technical summary 5

The Impact of Immigration on the Labor Market

“…The reaction of a country's labor market to immigration should depend on its institutional features. In many European countries (compared to Canada, the United Kingdom, and the United States), wages can be downwardly rigid due to the prevalence of generous welfare state benefits, high levels of minimum wage, and employment protections and dominant collective bargaining institutions (Card et al, 1999;Babecký et al, 2010). If following immigration wages cannot adjust downward, the level of unemployment can be expected to rise (either through a decline in the employment of incumbent workers or because the new entrants cannot find jobs).…”

European firm adjustment during times of economic crisis

“…Second, it reformed its labour regulations in 2009, imposing more flexible EPL and considerably lowering the layoff costs for employers 9 . As argued earlier, both factors tend to favour downward wage flexibility (see also Babecký et al 2010). Third, Estonia in 2009 was not yet a euro area member state and had a currency board arrangement; this differentiates it from the other two non-euro area countries in the sample that also have relatively flexible wage-setting systems but featured floating exchange rate regimes at the time: the Czech Republic and Poland.…”

What Survey Data Reveal about Price and Wage Rigidity in Portugal

“…those with high tenure and/or a permanent contract. This outcome finds some support in empirical studies (Babecky et al, 2010;Caju et al, 2007;Campbell and Kamlani, 1997). 3 However, only 20 per cent of the firms admit that the link is strong: in 7 per cent the decisions are taken at the same time, in 9 per cent changes in prices are taken only after wages are set, and in 4 per cent changes in wages occur only after prices are set.…”

“…The empirical literature on the factors that explain the importance of downward nominal and/or real wage rigidity is quite extensive. The models in this field typically regress a measure of downward nominal or real wage rigidity, computed at the firm, sectoral or country level, on a number of variables the theory suggests as potentially important to explain such differences (see, among others, Babecky et al, 2010;Caju et al, 2009;Dickens et al, 2007;Holden and Wulfsberg, 2008;Messina et al, 2010). Information on wage freezes has been used as a measure of the degree of downward nominal wage rigidity in a number of papers.…”