Mechanisms of the State Dependence of Wage Setting: Evidence from a Survey of Czech Firms

Drawing on firms' reactions to the changing macroeconomic conditions prior to and after the global financial crisis of 2008-09, this article presents evidence for the state dependence of wage setting. Further, the article investigates the underlying mechanisms of state dependence by distinguishing between firms' general characteristics and financial performance and the environment in which firms operate. The results, based on a survey of Czech firms, show that the frequency of wage adjustment is higher for large firms, foreign-owned firms, firms covered by collective agreements, firms in good financial condition, and firms facing positive shocks, while negative demand shocks and strong competition reduce the frequency of wage adjustment.