Non-Base Wage Components as a Source of Wage Adaptability to Shocks: Evidence from European Firms, 201002013

Jan Babecky,Clemence Berson,Fernando Martins,Petra Marotzke,Ana Lamo,Pawel Strzelecki,Ludmila Fadejeva

doi:10.2139/ssrn.3183873

Abstract

This paper provides evidence on the role of non-base wage components as a channel for firms to adjust labour costs in the event of adverse shocks. It uses data from a firm-level survey for 25 European countries that covers the period 2010–2013. We find that firms subject to nominal wage rigidities, which prevent them from adjusting base wages, are more likely to cut non-base wage components in order to adjust labour costs when needed. Firms thus use non-base wage components as a buffer to overcome base wage rigidity. We further show that while non-base wage components exhibit some degree of downward rigidity, they do so to a lesser extent than base wages.

Highlights

Micro-level data on wage variations and survey-based evidence on wage setting have revealed that even in the face of large negative shocks, are workers reluctant to accept cuts in their nominal wages, and firms seem to be unwilling to carry out such cuts
We examine the role of non-base wage components as a channel of labour cost adjustment in firms facing adverse economic shocks during 2010–2013
2.1 The WDN3 survey The data used in this paper were collected in the third wave of the Wage Dynamics Network survey (WDN3) coordinated by the European Central Bank

Summary

Introduction

Micro-level data on wage variations and survey-based evidence on wage setting have revealed that even in the face of large negative shocks, are workers reluctant to accept cuts in their nominal wages, and firms seem to be unwilling to carry out such cuts In some countries, these cuts are quite difficult to implement or even forbidden due to labour legislation. Based on information from a firm-level survey, Babecký et al (2012) examine the importance of a variety of strategies that firms may use to cut labour costs, when base wages are rigid They show that firms subject to DNWR are more likely to use these strategies, suggesting the presence of some degree of substitutability between base wage and non-base wages.

Data and stylised facts

Results

Conclusion