Definición operacional de variables

Research about wage rigidities has put a lot of emphasis on individuals’ wage dynamics, highlighting both nominal and real rigidities. However, what is important for the macroeconomic adjustment after a shock is the link between wages and firms’ pricing decisions and ultimately inflation. The flexibility of labour costs is an important element in the pricing decision of firms. Adjustment of labour costs could occur either through the adjustment of wages or through the adjustment of employment. Therefore, it is not sufficient for assessing the adjustment capability of the labour market to look only at wages rather than also taking into account employment.

Considering wage rigidity first, it is a well established fact that nominal base wages of individual workers are very rarely cut. A survey conducted among 17,000 European firms by the WDN (Wage Dynamic Network) delivers new evidence on nominal and real downward wage rigidities (hereafter DNWR and DRWR) as well as on alternative ways of adjusting the wage bill at the firm level (see Babecky et al., 2008). Overall, 14.2% of all surveyed firms in 15 EU countries display DRWR and 10.4% display DNWR (see Table 2.13), which for both is only a small fraction of all firms. A firm is classified as displaying DNWR if the respondent states that base wages have never been cut in the last 5 years and

as displaying DRWR if they ever linked base wages to inflation in the last 5 year. DNWR appears to be strongest in the Czech Republic, Estonia and the Netherlands and considerably smaller in Spain, France, Italy and Slovenia, while DRWR is especially prevalent in Spain and Slovenia and less so in Italy, Estonia and Poland.52 The breakdown by sector and firm size shows that DNWR is more prevalent in large firms and in the business service sector, while DRWR is more common for smaller firms and for firms in construction and trade. Moreover, DRWR is found to be stronger for firms covered by a collective wage bargaining agreement (as opposed to bargaining at the firm level) and for firms with a less qualified workforce (more blue-collar workers).

Table 2.13: Downward Nominal and Real Wage Rigidity across Country (Proportion of Firms by Country)

Downward nominal

wage rigidity Downward real wage rigidity

Austria 0.089 0.119 Belgium 0.058 NA Czech Republic 0.259 0.113 Estonia 0.211 0.047 Spain 0.021 0.544 France 0.026 0.096 Greece 0.115 0.199 Hungary 0.064 0.117 Ireland 0.079 0.087 Italy 0.038 0.017 Netherlands 0.211 NA Poland 0.096 0.067 Portugal 0.151 0.083 Slovenia 0.033 0.215 Total 0.142 0.104

Notes: The numbers for downward nominal wage rigidity refer to the proportion of firms which declare that they never cut their base wages during the last 5 years and the numbers for downward real wage rigidity refer to the proportion of firms which linked base wages to inflation at least once in the last 5 years

Source : Babecky et al. (2008)

The surveys also include questions on non-wage labour costs which play a role at least as important as base wages for the flexibility of total labour costs at the firm level. These include: bonus payments, fringe benefits, promotions, lower wage for new hires and early retirements. Analyzing the responses of firms on their preferred strategies of non-wage labour cost adjustment, cheap hires to replace workers who leave the firm and the adjustment of bonus payments are found to be the preferred strategies to adjust the wage

52 _{No question about DRWR was asked in the Belgian survey, as the institutional setting implies a}

bill. The choice of alternative ways of adjustment is found to be influenced by the firm characteristics, where firms operating in more competitive environments or in sectors with firm-level bargaining use the non-wage margins of adjustment more intensively. Furthermore, firms whose wages are subject to DNWR are more likely to use any of these strategies to reduce non-wage labour costs, suggesting that adjustment of non-wage labour costs could be a strategy to compensate DNWR and that overall labour costs are actually not as rigid as evidence on individual base wages might suggest.

The fact that the survey also includes questions on the price setting of firms allows an additional analysis of the link between wage and price setting at the firm level, an issue which is particularly relevant for this project. According to Druant et al. (2008), 40% of firms confirm the existence of a link between wage and price changes. A strong seasonal pattern in, both, price and wage adjustments is found in the data as changes appear to be highly synchronized, predominantly occurring in January. An econometric investigation of this link presented in this paper shows that firms with a comparatively lower labour share in total costs and firms that display a high frequency of wage adjustments tend to change their prices more frequently than others. This implies that, indeed, the share of wage costs in total production costs and the frequency of wage changes (although lower on average than the frequency of price changes) are important determinants - among other factors - of price adjustment and ultimately inflation. The paper also shows that the link between wage and price changes itself varies across firms and is stronger for firms for which the share of labour costs is high, competition in products markets is weak, there is no collective wage bargaining and if the technology of the firms is less advanced.

Another paper within the WDN which uses survey results for its empirical analysis deals with the reaction of firms to macroeconomic shocks. Bertola et al. (2008) find that the way firms react to cost-push and demand shocks, i.e. if they either adjust their wages or their employment, depends on the institutional characteristics and other conditions under which the firms operate. Specifically, in the case of a demand shock, firms are more likely to adjust their employment than their wages when they are exposed to foreign competition and when their wages are subject to a collective wage agreement, while they are more likely to adjust their wages in response to a demand shock when the degree of employment protection on the labour market is high. In the case of a cost-push shock, we see a stronger reaction of employment for firms with a higher labour share in total costs as well as for firms that are exposed to stronger competition on their operating market, while the adjustment through wages is more likely if, again, the degree of employment protection is high. Overall, the results reveal that wage and employment adjustments depend on the product market structure, international conditions and the existing labour market institutions, but strong heterogeneity is observed across countries. All these findings are consistent with existing theories on the transmission of macroeconomic shocks to the labour market.

The paper by Knell and Stiglbauer (2008) analyzes the influence of reference norms in wage setting to explain why and to what extent prices adjust sluggishly. The authors show

in a simple dynamic model of staggered wage setting that reference norms can be responsible for inflation persistence beyond the fact that prices are assumed to be sticky. They then test empirically which form of reference norm (external reference norms, sectoral leadership, habits and aggregate reference norms) explains best the degree of observed inflation persistence in Austrian data. The results suggest that the sectoral leadership norm, where wages are set according to wage changes in a “leading” sector, is most consistent with the data, followed by the external reference norm, where wage changes are set according to the average wage increase since the last wage change by the particular wage-setting unit.

The effect of DNWR and DRWR on optimal monetary policy in a monetary union is analyzed in the framework of a sticky price DSGE model in Fahr and Smets (2008). The presence of downward wage rigidity implies a strictly positive optimal rate of inflation and requires a more responsive monetary policy in response to an inflationary (negative productivity) shock, but a weaker reaction in response to a deflationary shock. Because price adjustment in this model inherits some of the upward bias of wage adjustment, optimal monetary policy has to react asymmetrically to positive and negate shocks as compared to the reference case without downward wage rigidity.

On the whole, these results tend to suggest that at the firm level, the link between prices and wages is not necessarily as strong as it appears to be at the macroeconomic level. This does not necessarily come as a surprise when we consider the - for many products low - share of labour costs in total production costs. Moreover, when they are facing a negative shock, firms tend to use a variety of channels to adjust their wage bill: given that downward (nominal and real) wage rigidity seems to be a stylized fact in most countries, employment and non-wage labour costs adjustment appear to be quite often used as a way to reduce total labour costs.