Downward nominal and real wage rigidity: Survey evidence from European firms

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. The author...

Full description

Saved in:
Bibliographic Details
Published in:Policy File 2009
Main Authors: Babecky, Jan, Caju, Philip Du, Kosma, Theodora, Lawless, Martina, Messina, Julian, Room, Tairi
Format: Report
Language:English
Subjects:
Economic policy
Labor force/Employment
The World Bank
Online Access:Request full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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. The authors analyse which firm-level and institutional factors are associated with wage rigidity. The 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). The analysis also finds 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.