Why Firms Avoid Cutting Wages: Survey Evidence from European Firms

Abstract

The rarity with which firms reduce nominal wages has been frequently observed, 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 they avoid cutting wages. 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 euro area countries but were one of the lowest ranked obstacles in non-euro area countries. 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.

High-Involvement Management, Economic Recession, Well-Being, and Organizational Performance

“…Indeed, there is some evidence from Europe that some firms have avoided at least one type of action, wage cutting, because of concerns about its effects on employee morale, attitudes, and commitment (Du Caju, Kosma, Lawless, Messina, & Rõõm, 2015). As curtailment of recessionary action may not always be an option, we need to think about ways of reducing the negative effects of recessionary action.…”

Wage flexibility and the great recession: the response of the Irish labour market

“…Du Caju et al (2013) analyse a 2007/2008 survey of European firms and find that only 2% report having cut wages over the previous five years; the figure for Ireland was just 1%. Using the same data, Babecký et al (2010) find that 10% of firms report having frozen base wages, with a corresponding figure for Ireland of 9%.…”

“…Earnings are defined as annual 'reckonable' income for the calendar year 6 ; this is gross income from all sources including bonuses and taxable benefits-in-kind after pension contributions, which are not taxable, have been deducted. 7 The fact that irregular earnings are included is important because firms can adjust labour costs through these components as well as basic pay; for evidence on the widespread use of adjustments to non-core pay, see Babecky et al (2012), Du Caju et al (2013) and Dias et al (2013). In addition, firms can react to labour market shocks by changing hours of work, so we believe that data on earnings are the most appropriate for capturing the flexibility firms have in adjusting costs.…”

Asymmetric wage adjustment and employment in European firms

“…Holden and Wulfsberg (2008) and Anderton and Bonthuis (2015) find that downward wage rigidities reflect institutional factors such as a high degree of union coverage and employment protection, while Anderton et al (2016) show that these institutional variables reduce the response of wages to unemployment. 7 Downward wage rigidities can also be the result of employers fearing that wage cuts would reduce their employees' motivation which would lead to a fall in workers' productivity as well as increasing the quits of the most productive workers (Stiglitz, 1974, Solow, 1979, Akerlof 1982, and Du Caju et al, 2015, where the latter use data from the first wave of the WDN).…”