The analysis is based on a survey, which was designed and implemented within the framework of the Wage Dynamics Network (WDN). This is a research network sponsored by a consortium of the EU national central banks and coordinated by the European Central Bank. The survey was carried out in summer 2009 by ten EU member states (Austria, Belgium, the Czech Republic, Estonia, France, Italy, Luxembourg, the Netherlands, Poland and Spain). The survey results show that since the beginning of the crisis, wage cuts were infrequent in most of the countries that we cover, whereas the frequency of wage freezes has increased substantially. This indicates that downward wage rigidity is still prevalent, at least in a relatively short term – firms are freezing wages instead of cutting them even in an environment of sharp economic downturn accompanied with near zero inflation. We assess the impact of various firm characteristics, product market competition and labour market institutional framework on downward wage rigidity by employing bivariate probit regressions where the dependent variables are binary indicators of wage freezes and wage cuts. The regression results imply that downward wage rigidity is more prevalent in large and unionized firms. We also find that the propensity of wage cuts is larger in the non-euro area countries included in the survey (Estonia, the Czech Republic and Poland).
The two most important causes for avoiding base wage cuts are the resulting reduction in work morale and the possibility that the most productive workers would leave as a consequence. These findings are in correspondence with earlier research on the US data by Bewley (1999) and Campbell and Kamlani (1997). Differently from the US, the WDN survey showed that the third prominent reason preventing nominal wage cuts in Europe were institutional restrictions, imposed either in the form of labour regulations or by collective agreements. The survey results also indicate that the relevance of all reasons has declined during the current crisis. The importance of institutional reasons has declined the least whereas the relevance of reasons influenced by labour market slackness has decreased the most.