WAGE RIGIDITIES AND LABOR MARKET ADJUSTMENT IN EUROPE

Based on an ad hoc firm-level survey on wage and pricing policies conducted in a large number of European countries, this study finds that about 60% of firms change base wages once a year with some clustering of wage changes observed in January. Differences in the frequency of wage changes between firms are mainly attributable to the institutional framework of the labor market in which they operate. There is evidence of both nominal and real downward wage rigidity. Moreover, when facing a negative shock, European firms prefer to reduce the amount of labor rather than cutting wages. Among those that decide to cut wages a majority prefers to cut flexible wage components rather than base wages. The rigidity of base wages is largely explained by fairness and efficiency considerations. (JEL: E24, J30)