GEP 15/09: Downward Wage Rigidities in the Euro Area

Summary

We test for downward wage rigidities using a panel of euro area countries. We find evidence of a lower responsiveness of wages to unemployment during downturns, which seems to reflect institutional factors.

Abstract

This paper estimates wage equations to test for changes in the responsiveness of wages to unemployment using panel estimates which pool the data across the euro area countries. More specifically, we investigate whether the sensitivity of euro area wages to movements in unemployment is different during downturns (i.e., downward wage rigidity), whether it has changed during the crisis and which institutional features might be driving the results. We find evidence of a lower responsiveness of wages to unemployment during downturns, consistent with the stylised facts that euro area wages are rigid downwards. We also find that the degree of downward wage rigidity has declined as the crisis became more prolonged. Overall, it seems that much of the downward wage rigidity reflects institutional factors, such as a high degree of union coverage and employment protection. Additionally, a rising share of the long-term unemployed lowers the responsiveness of wages to unemployment while a rising share of temporary labour seems to dampen wage growth.

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Authors

Robert Anderton and Boele Bonthuis

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