Dimensions and Consequences of Wage Rigidities in Germany

Evidence for nominal wage rigidities have been found in a number of recent studies for countries with decentralised wage determination. In this paper we examine wage rigidities in West Germany, where wages are determined in a mixed system of central wage bargaining between unions and employer associations or unions and firms and individual wage bargaining. Our estimates based on individual data from 1975 to 1995 confirm that the rigidity of nominal wages is a robust phenomenon also in Germany. Rigidities from central wage agreements, however, dominate. According to our estimates roughly 45 percent of employees who stay in the same plant for two consecutive years are protected against wage reductions below central wage agreements. Wage rigidities are more distinct for employees with more stable employment histories, longer tenure and for employees in larger firms. The strength of wage rigidities is measured with the amount of prohibited wage decreases in the absence of a wage rigidity, the wage sweep-up. The wage sweep-up varied between 4 and 8 percent. Without central wage bargaining and nominal wage rigidities wages the distribution of wage changes would have been less compressed. Wage rigidities have real consequences and the findings confirm the existence of bargaining power of employees in wage determination in Germany. On the individual level higher wage rigidities do not imply higher unemployment or future wage risks. On the aggregate level higher wage sweeps-ups are associated with lower sector employment growth rates. JEL-Classification: J30, J41, J51