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Flexible Wages and the Costs of Job Displacement

Author

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  • Fernández Guerrico, Sofía

    (University of Konstanz)

  • Tojerow, Ilan

    (Université Libre de Bruxelles)

Abstract

This paper investigates whether flexible pay increases the wage costs of job displacement. We use quasi-exogenous variation in the timing of job loss due to mass layoffs spanning over an institutional reform that restricted single-employer bargaining, the Belgian Wage Norm in 1996. We find that average earnings losses over a ten-year period after displacement are 10 percentage points larger under flexible pay. Workers displaced from jobs with higher employer-specific wage premiums-service sector and white-collar-benefit the most from restricted single-employer bargaining as their earnings fully converge to non-displaced workers' earnings within three years. We show that the differences in earnings losses across wage-setting systems are not driven by fluctuations in the business cycle. Finally, the wage-setting reform had similar effects on female workers, though it did not narrow the gender gap in pre-layoff wages. Our results suggest that reduced pay flexibility may help displaced workers catch up faster to non-displaced workers' pay premium ladder conditional on re-employment.

Suggested Citation

  • Fernández Guerrico, Sofía & Tojerow, Ilan, 2021. "Flexible Wages and the Costs of Job Displacement," IZA Discussion Papers 14942, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp14942
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    More about this item

    Keywords

    bargaining; wage flexibility; job displacement;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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