The Rationale for Wage Rigidity: Survey Evidence from German and US Firms

Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW. This study joins the literature which investigates the empirical relevance of prominent explanations for wage rigidity, such as contract theory, implicit contract theory, efficiency wage theories, fair wage theory and insider-outsider theory. Our study extends the existing literature by basing the findings on thorough econometric methods and a more adequate, because larger and randomly selected, data set. In addition, we analyze the statistical correlation between various explanations for wage rigidity, because , say, two different explanations may by themselves provide a rationale for not cutting wages on their own, but lose part of their explanatory power when both are relevant. Furthermore we compare explanations for wage rigidity between Germany and the United States, two countries with diverse labor market legislation. While the economic rationale for wage rigidity may be independent of national legislation , the relevance of each of these explanations may not. Depending on national labor legislation the role of any of these explanations for wage rigidity may differ. The bargaining power of employees and their unions will depend on employment protection , codetermination and collective wage bargaining legislation. Since German workers enjoy a higher degree of employment protection than American workers do and codetermination and collective bargaining is quite common in Germany, their bargaining power might be higher, especially in collective wage bargaining rounds. Differences in legislation may also indirectly influence the relevance of efficiency wage explanations for wage rigidity, because more strict employment protection legislation or a wider application of labor union contracts might impose more restrictions on firms wage policies. We surveyed 801 German firms and asked for their viewpoint with respect to the relevance of various explanations for wage rigidity. Moreover, we compared our results with those obtained by Campbell and Kamlani (1997) for the United States, but taking into account legal peculiarities of the German labor market system for wage determination. German firms strongly support labor union contracts as an explanation for wage rigidity for (less) skilled workers. Specific human capital and negative signals for new hires received strong support for highly skilled employees. Campbell and Kamlani (1997) found the strongest support for the adverse selection model as applied to quits for …