Labor Market Characteristics and Cross-Country Differences in Cost Stickiness

Abstract

This paper studies the impact of country-specific labor market characteristics on the degree of asymmetric cost behavior (i.e., cost stickiness) of firms' operating expense. We hypothesize that four important aspects of a labor market, namely, the overall bargaining power of trade unions, the extent of centralization and coordination in collective bargaining, the level of unemployment benefits, and the strictness of employment protection legislation, affect the flexibility of firms in adjusting labor resources and wage rates, hence driving the amount of cost changes as total activity levels change. Using a large cross-sectional sample of firms from nineteen OECD countries over the most recent 10-year period 1996-2005, we find that the cross-country variations in cost stickiness in operating expense are significantly associated with these labor market characteristics as expected, after controlling for firm-level determinants of cost stickiness,. Our results indicate that labor market structure and polices are important determinants of cost stickiness.

Keywords: cost stickiness, labor market charateristics, cross-country study, OECD