friedhelm pfeiffer

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

A Macroeconomic View on German Wage Stickiness

GNP L WAutocorrelation1 0,580 0,650 0,680 0,036 0,051 0,413Correlation with GNP --- 0,799 0,087Standard deviation 0,025 0,020 0,021 Deviations from trend, yearly numbers (Hodrick-Prescott-Filter); Pfeiffer (2003), p. 25 (West Germany 1975 – 1995) Friedhelm Pfeiffer

Different Methods in Economics

Empirical Analysis

Surveys

Experiments

Econometrics with official data

Theory

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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)

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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

Union bargaining power, profit maximization (efficiency wages, implicit contracts, ..), institutions

To compare our results with evidence from the USA

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Summary

Economic theories receive support from respondents

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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

The German Survey Wage Flexibility and

Employment

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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

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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)

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The Skill Structure of the Participating Firms

Variable Sample mean

Population mean Observations

Percentages Percentages Highly skilled workers 21,9 19,8 683Skilled workers 60,1 67,4 683Less skilled workers 18,0 12,8 683

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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:

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Not important

at all

Categories of Answers and Average Score

Average Score

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11 22Of minor

importance

33Moderatel

y important

44Very

important

2,52,5 Support

Average Score

3,03,0 Strong support

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.

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Wage Rigidity from the Viewpoint of Firms in

Germany

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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

3,182,94

2,40

US firms

2,052,40

1,35

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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 2,922,63

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US firms

2,602,79

2,59

Statement three:“A cut in wages would decrease workers’ effort, resulting in less output or poorer service.” (Shirking)

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1

1,5

2

2,5

3,5

3

German firmsUS firms

2,83 2,90 2,822,88 2,992,77

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)


German firms

1

1,5

2

2,5

3,5

3

US firms

2,44

2,85 2,97

2,562,73

2,96

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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)


1

1,5

2

2,5

3,5

3


2,242,50

2,85

2,18

3,44

3,08

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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)


German firms

1

1,5

2

2,5

3,5

3

US firms

3,10 3,133,27

2,842,732,80

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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)


German firms

1

1,5

2

2,5

3,5

3

US firms

2,46

3,10

3,40

2,202,36 2,30

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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)


1

1,5

2

2,5

3,5

3


2,05 2,161,82

2,45 2,352,45

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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?)

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1

1,5

2

2,5

3,5

3


3,043,103,08

2,232,48 2,52

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

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Support for economic explanations is not very sensitive to the chosen type of wage contract

Conclusions

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Conclusions

Various explanations receive support from respondents in firms

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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?

„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).

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Thank you for your attention!

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