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Wages, labor or prices: how do firms react to shocks?

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  • Dhyne, Emmanuel
  • Druant, Martine

Abstract

Survey results in 15 European countries for almost 15,000 firms reveal that Belgian firms react more than the average European firm to adverse shocks by reducing permanent and temporary employment. On the basis of a firm-level analysis, this paper confirms that the different reaction to shocks is significant and investigates what factors explain this difference. Although the explanatory value of the variables is limited, most of the explanatory power of the model being associated with the dummy variables coding for firm size, sector and country, the variables investigated provide valuable information. The importance of wage bargaining above the firm level, the automatic system of index-linking wages to past inflation, the limited use of flexible pay, the high share of low-skilled blue-collar workers, the labor intensive production process as well as the less stringent legislation with respect to the protection against dismissal are at the basis of the stronger employment reaction of Belgian firms. On the contrary, employment is safeguarded by the presence of many small firms and a wage cushion. JEL Classification: D21, E30, J31

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1224.

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Date of creation: Jul 2010
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Handle: RePEc:ecb:ecbwps:20101224

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Keywords: Cost-push shocks; demand shock; indexation; survey; wage bargaining institutions; wage rigidity;

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  1. Babecky, Jan & Caju, Philip Du & Kosma, Theodora & Lawless, Martina & Messina, Julian & Room, Tairi, 2009. "Downward nominal and real wage rigidity : survey evidence from European firms," Policy Research Working Paper Series 5159, The World Bank.
  2. Babecký, Jan & Du Caju, Philip & Kosma, Theodora & Lawless, Martina & Messina, Julián & Rõõm, Tairi, 2009. "The Margins of Labour Cost Adjustment: Survey Evidence from European Firms," Working Paper Series 1106, European Central Bank.
  3. Philip Du Caju & Catherine Fuss & Ladislav Wintr, 2009. "Understanding sectoral differences in downward real wage rigidity : workforce composition, institutions, technology and competition," Working Paper Research 156, National Bank of Belgium.
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