Abstract

The reaction of wages to changes in economic activity the cyclicity of wages is important for labour market policy as well as for monetary policy. In spite of a growing literature on this topic, there is only a limited knowledge about the role of bargaining institutions for the cyclicity of wages. We contribute to close this gap by estimating the reaction of wages to changes in economic activity using employer-employee data. This enables us to analyze the effect of collective wage contracts and of works councils on the cyclicity of wages. The level of economic activity is measured by regional unemployment and by the firm s sales per head. The results show: Wage growth is higher in firms with a works council and in firms covered by collective wage contracts, but there are only small differences in the cyclicity of wages. Only if we distinguish between positive and negative shocks, we find that in firms with a works council the cyclicity of wages is lower.