Does Experience of Wage Cuts Enhance Firm-level Wage Flexibility? Evidence from panel data analysis of Japanese firms

This paper uses firm-level panel data containing information of recent and past wage changes to investigate the possibility of wage increases of Japanese firms during a period of economic recovery. Among the many factors that influence firms' decision on wage increases, this paper focuses on the possibility that the experience of downward rigidity in nominal wages during recessions would also bring about upward rigidity during the recovery period. We examined whether the firms that have experienced difficulty in cutting nominal wages in recessions are more likely to hesitate in raising wages due to concern about facing difficulty again in cutting wages in future recessions. Our data suggest only about 20% of firms have cut scheduled wages in the past decade. In the estimation of wage increase function, we find that the firms which experienced cuts in scheduled wages in the past decade have tended to raise their scheduled wages in recent years when their profits increased. This result implies that one of the reasons for weak wage increases in Japanese firms recently is an irreversibility of increases in scheduled wages caused by downward wage rigidity.