ECB Monthly Bulletin, February 2009, Article: New survey evidence on wage setting in Europe

A proper understanding of the patterns, sources and implications of wage and labour cost dynamics is an essential requirement for the effective conduct of monetary policy. Wage costs are an important determinant of prices. The fi ndings of the Infl ation Persistence Network (IPN), a Eurosystem research network analysing the features and determinants of price setting in the euro area, suggest that inertial wage behaviour is an important factor behind price stickiness in the euro area.1 These fi ndings place wage-setting policies at the heart of central banks’ concerns. More generally, knowledge about the features and determinants of wage setting is key to understanding both the transmission process of monetary policy and the potential trade-offs with which monetary policy can be confronted. The fl exibility of wages is also of great importance for the proper functioning of a multi-country monetary union with segmented national labour markets, such as the euro area. The degree of price and wage fl exibility will, among other factors, determine the speed and cost of adjustment in the presence of emerging macroeconomic imbalances. Identifying the features of wage rigidities is of key importance in designing appropriate structural policies to facilitate this adjustment process. Against this background, the Eurosystem has set up a new research network, the Wage Dynamics Network (WDN), with researchers from the ECB and from 24 national central banks (NCBs) in the European Union conducting an in-depth study of the features and sources of wage and labour cost dynamics in the euro area and other EU countries. The WDN has followed three lines of research. The fi rst explores the empirical characterisation of aggregate, country and sectoral wage and labour cost dynamics in the euro area, and conducts a structural analysis of their determinants and their interaction with infl ation dynamics. A second line of research focuses on micro data on wages with a view to analysing wage behaviour and possible rigidities across countries and sectors in the euro area and their implications for labour costs and price-setting. Finally, the WDN has launched an ad hoc survey on wage and price-setting behaviour at the fi rm level. This article presents a fi rst set of fi ndings based on this survey. The survey provides a unique source of information that widens our understanding of wage-setting practices, the frequency of price and wage changes, and the links between wage and price stickiness in Europe. It makes available new