1. Reasons for Wage Rigidity in Germany Wolfgang Franz and Friedhelm Pfeiffer, Centre for European Economic Research (ZEW) and University of Mannheim National Bank of Belgium, Brussels, October 13, 2006

2. A Macroeconomic View on German Wage Stickiness GNPLW Autocorrelation 11 0,5800,6500,680  0,0360,0510,413 Correlation with GNP---0,7990,087 Standard deviation0,0250,0200,021 Deviations from trend, yearly numbers (Hodrick-Prescott-Filter); Pfeiffer (2003), p. 25 (West Germany 1975 – 1995) Friedhelm Pfeiffer

3. Different Methods in Economics  Empirical Analysis  Surveys  Experiments  Econometrics with official data  Theory Friedhelm Pfeiffer

4. Advantages and Disadvantages of Surveys  Variety of firms  Asking about the relevance of various theories  Do people mean what they say?  Item non response …… …… „If molecules could talk, would chemists refuse to listen?” Blinder et al. (1998) Friedhelm Pfeiffer

5. Research Goals of the German Survey  To shed some light on the relevance of various explanations for wage rigidity from the viewpoint of firms in Germany, taking institutions into account To shed some light on the relevance of various explanations for wage rigidity from the viewpoint of firms in Germany, taking institutions into account  Union bargaining power, profit maximization (efficiency wages, implicit contracts,..), institutions Union bargaining power, profit maximization (efficiency wages, implicit contracts,..), institutions  To compare our results with evidence from the USA To compare our results with evidence from the USA Friedhelm Pfeiffer

6. Summary  Economic theories receive support from respondents Friedhelm Pfeiffer  Efficiency wage explanations (shirking, turnover, adverse selection, negative signals, specific human capital) are supported to different degrees  Implicit contract theory & union bargaining power received more support in Germany (rel. to USA)  Implicit contract theory & union bargaining power do matter for (low) skilled workers

7. The German Survey Wage Flexibility and Employment Friedhelm Pfeiffer

8.  801 firms successfully interviewed, from 5,160, randomly selected from firm population of 160,000 (stratified by number of employees and sector)  response rate: 16 percent  chemical industry; metal industry, electrical goods industry and machinery; wholesale and retail trade; finance and insurance; firm related services and other sectors  standardized written questionnaire The Survey, Conducted in Spring 2000 by ZEW Friedhelm Pfeiffer

9. V. Individual bilateral contracts IV. Individual contract, firm level III. Voluntary application of labour union contracts II. Firm specific labour union contracts I. Collective labour union contracts All (#785) Institutions: Type of Wage Contracts (%) 31,412,924,429,11354,6 10,74,77,314,81011,4 10,717,78,912,236,4 4,23,53,33,992,7 4461.256406525 Finance and insurance (10.8) Wholesale and retail trade (15.7) Industry (29.3)Chemistry (12.8) Firm related services (28.1) Friedhelm Pfeiffer

10. The Skill Structure of the Participating Firms Variable Sample mean Population mean Observations Percentages Highly skilled workers21,919,8683 Skilled workers60,167,4683 Less skilled workers18,012,8683 Friedhelm Pfeiffer

11. Introduction “Even in economically bad times or in times of high unemployment, firms seldom reduce workers’ pay, although that may help them survive and save working places. Please assess the following explanations as ‘not important’, ‘of minor importance’, ‘moderately important’ or ‘very important ’.”  The introductory statement: Friedhelm Pfeiffer

12. Not important at all Categories of Answers and Average Score Average Score Friedhelm Pfeiffer 12 Of minor importance 3 Moderately important 4 Very important  2,5  2,5  Support Average Score  3,0  3,0  Strong support

13. Selected Literature  Bewley T.F. (1999), Why wages Don’t Fall During a Recession, Cambridge, MA: Harvard University Press.  Blinder A.S. and Choi D.H. (1990), A Shred of Evidence on Theories of Wage Stickiness, Quarterly Journal of Economics.  Campbell C. M. and Kamlani K. S. (1997), The Reason for Wage Rigidity: Evidence from a Survey of Firms, Quarterly Journal of Economics.  Franz W. and Pfeiffer F. (2005), A Note on Labor Contracts and Wage Rigidities: An Empirical Investigation Using Survey Data, Applied Economics Quarterly. Friedhelm Pfeiffer

14. Wage Rigidity from the Viewpoint of Firms in Germany Friedhelm Pfeiffer

15. Less skilled Skilled Highly skilled Statement one: “Labour union contracts prevent wages from being cut.” 1 1,5 2 2,5 3,5 3 German firms 3,18 2,94 2,40 US firms 2,05 2,40 1,35 Friedhelm Pfeiffer

16. Less skilled Skilled Highly skilled Statement two: Workers dislike unpredictable changes in income. Therefore, workers and firms reach an implicit understanding that wages will neither fall in recessions nor rise in expansions.” (Implicit contract theory) 1 1,5 2 2,5 3,5 3 German firms 2,93 2,92 2,63 Friedhelm Pfeiffer US firms 2,60 2,79 2,59

17. Statement three: “A cut in wages would decrease workers’ effort, resulting in less output or poorer service.” (Shirking) Friedhelm Pfeiffer Less skilled Skilled Highly skilled 1 1,5 2 2,5 3,5 3 German firms US firms 2,83 2,90 2,82 2,88 2,99 2,77

18. Statement four: ”A cut in wages would increase the number of workers who quit, increasing the cost of hiring and training new workers in the future.” (Turnover costs) Less skilled Skilled Highly skilled German firms 1 1,5 2 2,5 3,5 3 US firms 2,44 2,85 2,97 2,56 2,73 2,96 Friedhelm Pfeiffer

19. Statement five: “Workers who have been with the firm for a long time have learned how the firm operates and have formed relationships with co-workers and clients. A cut in wages may cause some of your long-time employees to leave, and their replacements would not have this inside knowledge of the firm.” (Specific human capital) Less skilled Skilled Highly skilled 1 1,5 2 2,5 3,5 3 German firms US firms 2,24 2,50 2,85 2,18 3,44 3,08 Friedhelm Pfeiffer

20. Statement six: ”If your firm were to cut wages, your most productive workers might leave, whereas if you lay off workers, you can lay off the least productive workers.” (Adverse selection) Less skilled Skilled Highly skilled German firms 1 1,5 2 2,5 3,5 3 US firms 3,10 3,13 3,27 2,84 2,73 2,80 Friedhelm Pfeiffer

21. Statement seven: “If your firm were to cut wages, people in the community would hear about it, making it more difficult to hire workers in the future.” (Negative signals for new hires) Less skilled Skilled Highly skilled German firms 1 1,5 2 2,5 3,5 3 US firms 2,46 3,10 3,40 2,20 2,36 2,30 Friedhelm Pfeiffer

22. Statement eight: “If your firm were to discharge some of its current workers and to hire new workers at a lower wage, the workers who remain would harass and refuse to cooperate with the newly hired workers.” (Harrassment) Less skilled Skilled Highly skilled 1 1,5 2 2,5 3,5 3 German firms US firms 2,05 2,16 1,82 2,45 2,35 2,45 Friedhelm Pfeiffer

23. Statement nine: “Independent of the effect of wage cuts on profits, people in management positions would be reluctant to cut wages in order to avoid employees´ resentment toward them.” (corporate culture, gift exchange?) Friedhelm Pfeiffer Less skilled Skilled Highly skilled 1 1,5 2 2,5 3,5 3 German firms US firms 3,04 3,10 3,08 2,23 2,48 2,52

24.  Bivariate tests  Ordered probit models for each statement and each group  Correlation analysis between the statements and the groups  Study of differences between type of contracts Additional Pieces of Analysis Friedhelm Pfeiffer  Support for economic explanations is not very sensitive to the chosen type of wage contract

25. Conclusions Friedhelm Pfeiffer

26. Conclusions  Various explanations receive support from respondents in firms Friedhelm Pfeiffer  The influence of institutions on respondents support seems to be at best moderate  Future surveys can be improved  What can policy do, if wage rigidity is in the interest of firms and their employees?

27. „It is hard to take a detached view on wage rigidity, because it requires facing unpleasant truths; the world is imperfect, people often suffer for no good reasons, and it is not clear what to do about it.“ Truman F. Bewley (1999:2). Friedhelm Pfeiffer

28. Thank you for your attention! Friedhelm Pfeiffer