Shocks and Labour Cost Adjustment: Evidence from a Survey of European Firms

44 Pages Posted: 24 Apr 2019

See all articles by Thomas Y. Mathä

Thomas Y. Mathä

Banque centrale du Luxembourg

Stephen Millard

Bank of England

Tairi Room

Bank of Estonia

Ladislav Wintr

Banque Centrale du Luxembourg

Robert Wyszynski

National Bank of Poland

Multiple version iconThere are 2 versions of this paper

Date Written: April 18, 2019

Abstract

We use firm-level survey data from 25 EU countries to analyse how firms adjust their labour costs (employment, wages and hours) in response to shocks. We develop a theoretical model to understand how firms choose between different ways to adjust their labour costs. The basic intuition is that firms choose the cheapest way to adjust labour costs. Our empirical findings are in line with the theoretical model and show that the pattern of adjustment is not much affected by the type of the shock (demand shock, access-to-finance shock, ‘availability of supplies’ shock), but differs according to the direction of the shock (positive or negative), its size and persistence. In 2010-13, firms responding to negative shocks were most likely to reduce employment, then hourly wages and then hours worked, regardless of the source of the shock. Results for the 2008-09 period indicate that the ranking might change during deep recession as the likelihood of wage cuts increases. In response to positive shocks in 2010-13, firms were more likely to increase wages, followed by increases in employment and then hours worked suggesting an asymmetric reaction to positive and negative shocks. Finally, we show that strict employment protection legislation and high centralisation or coordination of wage bargaining make it less likely that firms reduce wages when facing negative shocks.

Keywords: shocks, firms, labour cost adjustment, wages, employment, hours, survey

JEL Classification: D21, D22, D24

Suggested Citation

Mathä, Thomas Y. and Millard, Stephen and Room, Tairi and Wintr, Ladislav and Wyszynski, Robert, Shocks and Labour Cost Adjustment: Evidence from a Survey of European Firms (April 18, 2019). ECB Working Paper No. 2269 (2019); ISBN 978-92-899-3531-9 . Available at SSRN: https://ssrn.com/abstract=3376491

Thomas Y. Mathä (Contact Author)

Banque centrale du Luxembourg ( email )

2, bd Royal
L-2983 Luxembourg
Luxembourg
+352 4774 4270 (Phone)
+352 4774 4920 (Fax)

Stephen Millard

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tairi Room

Bank of Estonia ( email )

Estonia Building 13
15095 Tallinn
Estonia

Ladislav Wintr

Banque Centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

Robert Wyszynski

National Bank of Poland ( email )

00-919 Warsaw
Poland

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