How Selective Are Real Wage Cuts? A Micro‐analysis Using Linked Employer–Employee Data

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Nontechnical SummaryExisting evidence suggests that workers face a low risk of experiencing a real wage reduction.However, there is so far virtually no evidence whether some employee groups are affected stronger by wage cuts than other groups. Insider-outsider and several branches of efficiency wage theory predict selective wage cuts especially for employees who are less important for firm performance, whereas some recent contributions discard selective wage reductions and stress fairness considerations instead. In this paper, we investigate whether employers who (have to) reduce real wages do so in a selective manner. Using German linked employeremployee panel data for the homogenous group of young workers in the first five years of their first job, we fit linear models for individuals' probability of experiencing a real wage cut.We include plant fixed effects that control for permanent differences in plants' wage policies.We find clear evidence that plants resort to selective wage reductions. Medium-skilled and especially high-skilled workers are less likely to face a real wage reduction than low-skilled workers. The same holds for workers who have just recently been hired. Adding workers' wage residual estimated from an extended Mincerian wage regression for the previous year as a measure of unobserved worker performance, we further find that workers with a higher residual have a significantly lower incidence of real wage cuts. Notably, the very same selectivity pattern shows up when restricting our analysis to firms covered by collective agreements or having a works council. Our finding is clearly in line with insider-outsider and several branches of efficiency wage theory. It is at odds, however, with fairness considerations pressing employers to selectively reduce wages such that wage dispersion among peers is reduced. We thus conclude that real wage reductions, though rare in general, are specifically aimed at those groups of workers who are less crucial to firm performance. whether firms implement real wage reductions in a selective manner. In line with insideroutsider and several strands of efficiency wage theory, we find strong evidence for selective wage cuts with high-productivity workers being spared even when controlling for permanent differences in firms' wage policies. In contrast to some recent contributions stressing fairness considerations, we also find that wage cuts increase wage dispersion among peers rather than narrowing it. Notably, the ...

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