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Economics in a picture

Economics in a picture

The higher incidence of wage freezes in Portugal is contemporary with higher unemployment rates

17.07.2020

Economics in a picture: The higher incidence of wage freezes in Portugal is contemporary with higher unemployment rates

 

The increase in the incidence of wage freezes, particularly in a context of economic recession and low inflation, is a credible indicator of downward nominal wage rigidity. This phenomenon was especially marked in Portugal during the last economic crisis in which, in view of the aversion (and legal impossibility) to reduce wages, a significant share of firms chose to freeze the base wages of their workers. The percentage of workers with frozen base wages reached around 75% in 2012 and 2013, indicating the existence of a substantial degree of downward nominal wage rigidity in the Portuguese labour market.

 

Nominal wage rigidity does not necessarily have a real impact on the economy if firms can adjust future wage variations in order to offset rising real labor costs. The evidence shows that this may not have been the case in Portugal. Between 2004 and 2017, there was a very strong correlation between the incidence of wage freezes and the unemployment rate, suggesting the Keynesian hypothesis that the downward nominal wage rigidity could have fuelled an increase in unemployment.

 

 

  

For more details see Fernando Martins and Pedro Portugal (2019) “How did the downward wage rigidity shape unemployment during the crisis?” in Portuguese economic growth: A view on structural features, blockages and reforms, Banco de Portugal.

 

Prepared by Fernando Martins and Pedro Portugal. The analyses, opinions, and findings expressed above are those of the authors and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.

 

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