Firms' price and wage adjustment in Europe: Survey evidence on nominal stickiness ☆ , ☆☆ Martine Druant a , Silvia Fabiani b , Gabor Kezdi c , Ana Lamo d , Fernando Martins e, ⁎, Roberto Sabbatini b a National Bank of Belgium, Belgium b Bank of Italy, Italy c Central European University and Magyar Nemzeti Bank, Hungary d European Central Bank, Germany e Bank of Portugal, ISEG (Technical University of Lisbon) and Universidade Lusíada of Lisbon, Portugal abstract article info Article history: Received 5 August 2010 Received in revised form 23 January 2012 Accepted 18 March 2012 Available online 28 March 2012 JEL classification: D21 E30 J31 Keywords: Wage rigidity Price rigidity Indexation Time dependence Labor market institutions Survey This paper presents new evidence on the patterns of price and wage adjustment in European firms and on the extent of nominal rigidities. It uses a unique dataset collected through a firm-level survey conducted in 17 European countries and covering various sectors. Several conclusions are drawn from this evidence. Firms ad- just wages less frequently than prices, on average every 15 and 10 months, respectively. Price and, especially, wage adjustment exhibit a substantial degree of time-dependence. In particular, wage changes tend to clus- ter at a specific time of the year, mostly January in the majority of countries. The results of a multivariate anal- ysis indicate that prices are more flexible when competitive pressures in product markets are strong and when labor costs account for a lower fraction of firms' total costs, whereas wages are more flexible when bargaining is decentralized and when the coverage of collective bargaining and the stringency of employment protection leg- islation are low. Price rigidities are higher in firms with a larger share of high-skilled/white-collar workers. © 2012 Elsevier B.V. All rights reserved. 1. Introduction A recurrent theme in macroeconomics is whether the adjustment of prices and wages is sufficiently rapid to allow an efficient allocation of resources. In recent decades, a substantial amount of theoretical re- search devoted to improving the microeconomic foundations of mac- roeconomic behavior has shown that nominal rigidities are key in determining the effects of different shocks on the economy. This paper focuses on the nature, extent and sources of nominal ri- gidities in Europe. Based on new firm-level survey data, it addresses the following issues. How often are prices and wages adjusted in Eu- ropean countries? Is the adjustment staggered or synchronized and does it tend to cluster in specific periods? Are there significant differ- ences across firms, sectors and countries in the frequency and timing of wage and price changes? If such differences are indeed present, how do they relate to structural features of product markets, to the institutional setting that governs wage formation and to firm- specific characteristics? In answering these questions, this paper provides evidence that en- riches the toolbox for the design and calibration of micro-founded New Keynesian DSGE models with nominal rigidities, which have be- come very popular for policy analysis (see, among others, Woodford, 2003; Gali et al., 2003; Smets and Wouters, 2003 and its various exten- sions). In these models, the sluggish response of prices and wages to shocks depends on several factors. One of them is the adjustment mech- anism generating nominal rigidity, i.e. the type of contract adopted to set prices and wages: in the Calvo (1983) framework price (or wage) setters face a constant probability of adjustment, while in the Taylor (1980) Labour Economics 19 (2012) 772–782 ☆ This paper has been prepared in the context of the Eurosystem Wage Dynamic Network (WDN) research project. We are very grateful to Giuseppe Bertola, Alan Blinder, Alan Krueger, Juan F. Jimeno, Hervé le Bihan, Julian Messina, Paolo Sestito, Frank Smets and participants at the regular Bank of Spain seminar and at the 2009 AEA meeting for their useful comments and suggestions. We also thank all members of the WDN for their fruitful cooperation and Rebekka Christopoulou for her remarkable data assistance. The opinions expressed in the paper are those of the authors and do not necessarily reflect the views of the institutions they belong to. ☆☆ This paper is a part of the Special Section: Evidence from the Eurosystem's Wage Dynamics Network Survey. ⁎ Corresponding author. E-mail address: silvia.fabiani@bancaditalia.it (S. Fabiani). 0927-5371/$ – see front matter © 2012 Elsevier B.V. All rights reserved. doi:10.1016/j.labeco.2012.03.007 Contents lists available at SciVerse ScienceDirect Labour Economics journal homepage: www.elsevier.com/locate/labeco