Mechanisms of the State Dependence of Wage Setting: Evidence from a Survey of Czech Firms

Abstract

Drawing on firms’ reactions to the changing macroeconomic conditions prior to and after the global financial crisis of 2008–09, this article presents evidence for the state dependence of wage setting. Further, the article investigates the underlying mechanisms of state dependence by distinguishing between firms’ general characteristics and financial performance and the environment in which firms operate. The results, based on a survey of Czech firms, show that the frequency of wage adjustment is higher for large firms, foreign-owned firms, firms covered by collective agreements, firms in good financial condition, and firms facing positive shocks, while negative demand shocks and strong competition reduce the frequency of wage adjustment.

Keywords:

• state dependence
• survey data
• wage setting

JEL Classification:

• C83
• J31
• J41
• L11

ACKNOWLEDGMENTS

The survey questionnaire was the outcome of a coordinated effort within the ECB Wage Dynamics Network working group. We thank the participants of the CNB seminar and the WDN meetings for useful comments. All errors and omissions are ours. The views expressed in this article are those of the authors and do not necessarily represent those of the Czech National Bank.

FUNDING

This work was supported by Czech National Bank Research Project No. D2/14.

Notes

1. More information on the WDN is available on the network’s Website: http://www.ecb.europa.eu/pub/economic-research/research-networks/html/researcher_wdn.en.html.

2. Further details are provided in Hájková and Koprnická (2009, Box 3) and Babecký, Galuščák, and Lízal (2011, Section 5).

3. The sample was drawn independently from the previous round of the survey.

4. Note that endogeneity could represent an issue in probit regressions with cash-flow-to-assets ratio and productivity variables, since the effect of demand changes could be transmitted to firm performance indicators. The problem is attenuated by using averages over the survey period. Given the explorative character of the empirical analysis, a proper formal treatment of endogeneity is left for follow-up research topics. The estimates of the state dependence of wage setting should thus be viewed as reflecting the upper bound of the estimates.

Additional information

Funding

This work was supported by Czech National Bank Research Project No. D2/14.

Notes on contributors

Jan Babecký

Jan Babecký is Research Coordinator at the Czech National Bank, Prague, Czech Republic. Kamil Galuščák is Adviser to the Board at the Czech National Bank, Prague, Czech Republic. Diana Žigraiová is Junior Researcher at the Institute of Economic Studies, Charles University, Prague, Czech Republic.

Kamil Galuščák

Jan Babecký is Research Coordinator at the Czech National Bank, Prague, Czech Republic. Kamil Galuščák is Adviser to the Board at the Czech National Bank, Prague, Czech Republic. Diana Žigraiová is Junior Researcher at the Institute of Economic Studies, Charles University, Prague, Czech Republic.

Diana Žigraiová

Jan Babecký is Research Coordinator at the Czech National Bank, Prague, Czech Republic. Kamil Galuščák is Adviser to the Board at the Czech National Bank, Prague, Czech Republic. Diana Žigraiová is Junior Researcher at the Institute of Economic Studies, Charles University, Prague, Czech Republic.