Wage rigidity and employment adjustment at the firm level: Evidence from survey data

Abstract

This paper uses firm level survey data from Portugal to investigate how firms adjust their labour costs in the presence of wage rigidities. We document that Portuguese firms, besides reducing employment or freezing nominal base wages, also make frequent use of other cost-cutting strategies, like freezing or cutting bonus and other monetary or non-monetary benefits, slowing down or freezing the rate at which promotions are filled, or recruiting new employees at wages lower than those received by the employees that have left the firm. We show that the utilization of these different adjustment strategies is affected by workers' and firms' attributes, as well as by some indicators of the economic environment in which firms operate. More importantly, we provide evidence that firms with more flexible base wages are less likely to reduce employment, and that such effect may be significantly strengthened by the availability of alternative labourcost adjustment margins that firms can use in bad times.

Wage flexibility and the great recession: the response of the Irish labour market

“…Earnings are defined as annual 'reckonable' income for the calendar year 6 ; this is gross income from all sources including bonuses and taxable benefits-in-kind after pension contributions, which are not taxable, have been deducted. 7 The fact that irregular earnings are included is important because firms can adjust labour costs through these components as well as basic pay; for evidence on the widespread use of adjustments to non-core pay, see Babecky et al (2012), Du Caju et al (2013) and Dias et al (2013). In addition, firms can react to labour market shocks by changing hours of work, so we believe that data on earnings are the most appropriate for capturing the flexibility firms have in adjusting costs.…”

What Survey Data Reveal about Price and Wage Rigidity in Portugal

“…Dias et al . () provide evidence that firms with more flexible base wages are less likely to reduce employment, and that such effect may be significantly strengthened by the availability of alternative margins of labor‐cost adjustment that firms can use in bad times. The questionnaire included a question that attempted to capture the importance of these margins.…”

Asymmetric wage adjustment and employment in European firms

“…Babecký et al (2012) highlight the substitutability between base wage flexibility and alternative labour cost adjustments: firms facing base wage rigidities, defined as firms freezing wages, are more likely to use alternative margins. Using microdata on Portugal, Dias et al (2013) find that firms with more flexible base wages, which they define as firms that freeze wages, are less likely to reduce employment. This is strengthened by the availability of alternative labour cost adjustment mechanisms.…”