The Reasons for Wage Rigidity: Evidence from a Survey of Firms

Abstract

A survey of 184 firms was conducted to investigate the reasons for wage rigidity. The strongest support was found for explanations based on adverse selection in quits and on the effect of wages on effort. In addition, survey respondents indicated that reducing turnover is an important explanation of wage rigidity for white-collar workers, and that implicit contracts are an important explanation for other workers. Respondents also believed that effort responds more strongly to wage decreases than to wage increases and that wage decreases have a greater impact on the effort of low-skilled workers than of high-skilled workers.