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Why firms avoid cutting wages : survey evidence from European firms

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  • Du Caju, Philip
  • Kosma, Theodora
  • Lawless, Martina
  • Messina, Julian
  • Room, Tairi

Abstract

Firms very rarely cut nominal wages, 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 the firms avoid cutting wages. 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. 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 Western European (EU-15) countries but were one of the lowest ranked obstacles in the new EU member states in Central and Eastern Europe.

Suggested Citation

  • Du Caju, Philip & Kosma, Theodora & Lawless, Martina & Messina, Julian & Room, Tairi, 2014. "Why firms avoid cutting wages : survey evidence from European firms," Policy Research Working Paper Series 6976, The World Bank.
    • Handle: RePEc:wbk:wbrwps:6976
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    References listed on IDEAS

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    More about this item

    Keywords

    Labor Markets; Labor Policies; Microfinance; Labor Management and Relations; Income;
    All these keywords.

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • P5 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems

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