Labor cost adjustments during the Great Recession: wages, separations, and labor market frictions

Abstract

Using Swedish microdata, I analyze wage adjustments and employment flows following an aggregate demand shock. For identification, I exploit firm-level variation in exposure to the Great Recession, driven by differences in export-to-sales ratios. I estimate a wage-to-output elasticity of 6\% for incumbent workers, but the primary channel of adjustment occurred through employment reductions. Wage-setting institutions affected these responses: workers covered by predetermined union contracts with individual wage-growth guarantees experienced employment-to-output responses more than four times as large as their wage-to-output elasticities, while workers covered by less stringent contracts exhibited an  employment-to-wage adjustment ratio below one.

Keywords: Wages, Firms, Collective Bargaining, Microdata, the Great Recession, Wage Rigidity E24, J20, J31, J52

JEL Classification: J52, J31, J20, E24