Who bears the burden of wage cuts? Evidence from Finland during the 1990s

Abstract

PurposeThis paper aims to explore the incidence of nominal and real wage cuts in the Finnish private sector during the 1990s.Design/methodology/approachEstimation of econometric models for the probability of wage cuts using individual‐level wage survey data from the payroll records of the Finnish employers' organizations.FindingsCentralized nominal wage freezes together with a positive inflation rate produced real wage cuts for a large proportion of workers during the worst recession years of the early 1990s. Hence, centralized bargaining shaped the adjustment. The share of nominal wage cuts does not increase with falling inflation, which is consistent with downward wage rigidities. Full‐time workers have had a lower likelihood of wage cuts compared with part‐time workers. Declines in wages have also been more common in small plants. There is an important transitory component in wage cuts.Practical implicationsProvides useful information about the adjustment of wages at the individual level.Originality/valueFew papers have analysed individual and employer characteristics that account for wage cuts. The paper contributes to the literature on wage rigidity.