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Wages and the Risk of Displacement

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  • Carneiro, Anabela

    ()
    (University of Porto)

  • Portugal, Pedro

    ()
    (Banco de Portugal)

Abstract

In this paper a simultaneous-equations model of firm closing and wage determination is developed in order to analyse how wages adjust to unfavorable shocks that raise the risk of displacement through firm closing, and to what extent a wage change affects the exit likelihood. Using a longitudinal matched worker-firm data set from Portugal, the results show that the fear of job loss generates wage concessions instead of compensating differentials. A novel result that emerges from this study is that firms with a higher incidence of minimum wage earners are more vulnerable to adverse demand shocks due to their inability to adjust wages downward. In fact, minimum wage restrictions were seen to increase the failure rates.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1926.

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Length: 24 pages
Date of creation: Jan 2006
Date of revision:
Publication status: published in: Research in Labor Economics, 2008, 28, 251-276
Handle: RePEc:iza:izadps:dp1926

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Keywords: displacement risk; concessions; wages;

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References

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  1. Dunne, T. & Roberts, M.J., 1990. "Wages And The Risk Of Plant Closing," Papers, Pennsylvania State - Department of Economics 6-90-2, Pennsylvania State - Department of Economics.
  2. Louis S. Jacobson & Robert J. LaLonde & Daniel G. Sullivan, 1992. "Earnings losses of displaced workers," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 92-28, Federal Reserve Bank of Chicago.
  3. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, December.
  4. Guimaraes, Paulo & Mata, José & Portugal, Pedro, 1995. "The Survival of New Plants: Start-up Conditions and Post-entry Evolution," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1203, C.E.P.R. Discussion Papers.
  5. Blanchflower, D., 1989. "Fear, Unemployment And Pay Flexibility," Papers, London School of Economics - Centre for Labour Economics 344, London School of Economics - Centre for Labour Economics.
  6. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, American Economic Association, vol. 91(1), pages 187-207, March.
  7. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "The Growth And Failure Of U.S. Manufacturing Plants," Papers, Pennsylvania State - Department of Economics 1-87-5, Pennsylvania State - Department of Economics.
  8. Harris, R. I. D. & Hassaszadeh, P., 2002. "The impact of ownership changes and age effects on plant exits in UK manufacturing, 1974-1995," Economics Letters, Elsevier, Elsevier, vol. 75(3), pages 309-317, May.
  9. Mark E. Doms & J . Bradford Jensen, 1998. "Comparing Wages, Skills, and Productivity between Domestically and Foreign-Owned Manufacturing Establishments in the United States," NBER Chapters, in: Geography and Ownership as Bases for Economic Accounting, pages 235-258 National Bureau of Economic Research, Inc.
  10. Murphy, Kevin M & Topel, Robert H, 1985. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 3(4), pages 370-79, October.
  11. J. Bradford Jensen & Andrew B Bernard, 2002. "The Deaths of Manufacturing Plants," Working Papers 02-15, Center for Economic Studies, U.S. Census Bureau.
  12. Kumar, M S, 1985. "Growth, Acquisition Activity and Firm Size: Evidence from the United Kingdom," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 33(3), pages 327-38, March.
  13. Margolis, D.N., 2000. "Worker Displacement in France," Papiers d'Economie Mathématique et Applications, Université Panthéon-Sorbonne (Paris 1) 2000.03, Université Panthéon-Sorbonne (Paris 1).
  14. David Margolis, 1999. "Part-Year Employment, Slow Reemployment and Earnings Losses : The Case of Worker Displacement in France," Working Papers, Centre de Recherche en Economie et Statistique 99-04, Centre de Recherche en Economie et Statistique.
  15. repec:fth:inseep:9904 is not listed on IDEAS
  16. Hamermesh, Daniel S, 1988. "Plant Closings and the Value of the Firm," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 580-86, November.
  17. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, Econometric Society, vol. 50(3), pages 649-70, May.
  18. John T. Addison & Lutz Bellmann & Arnd Kölling, 2004. "Works Councils and Plant Closings in Germany," British Journal of Industrial Relations, London School of Economics, vol. 42(1), pages 125-148, 03.
  19. Cooper, Arnold C. & Gimeno-Gascon, F. Javier & Woo, Carolyn Y., 1994. "Initial human and financial capital as predictors of new venture performance," Journal of Business Venturing, Elsevier, vol. 9(5), pages 371-395, September.
  20. Stevens, Ann Huff, 1997. "Persistent Effects of Job Displacement: The Importance of Multiple Job Losses," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 15(1), pages 165-88, January.
  21. Mata, Jose & Portugal, Pedro, 1994. "Life Duration of New Firms," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 42(3), pages 227-45, September.
  22. José Mata & Pedro Portugal, 2001. "The Survival of New Domestic and Foreign Owned Firms," Working Papers, Banco de Portugal, Economics and Research Department w200101, Banco de Portugal, Economics and Research Department.
  23. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 35(4), pages 583-606, June.
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Citations

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Cited by:
  1. Pedro Portugal, 2006. "Wage Setting in the Portuguese Labor Market: A Microeconomic Approach," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.
  2. Guido Schwerdt, 2008. "Labor Turnover before Plant Closure: ‘Leaving the Sinking Ship’ vs. ‘Captain Throwing Ballast Overboard’," CESifo Working Paper Series 2252, CESifo Group Munich.
  3. Luiz A. Esteves, 2008. "Risk of Firm Closure and Wages in Brazil: Compensating Wage Di erentials or Bargaining Concessions?," Working Papers, Universidade Federal do Paraná, Department of Economics 0077, Universidade Federal do Paraná, Department of Economics.
  4. Kevin McKinney & Lars Vilhuber, 2006. "Using linked employer-employee data to investigate the speed of adjustments in downsizing firms," Longitudinal Employer-Household Dynamics Technical Papers, Center for Economic Studies, U.S. Census Bureau 2006-03, Center for Economic Studies, U.S. Census Bureau.
  5. Uwe Jirjahn, 2010. "Nonunion Worker Representation and the Closure of Establishments: German Evidence on the Role of Moderating Factors," Research Papers in Economics 2010-01, University of Trier, Department of Economics.
  6. Anabela Carneiro & José Varejão, 2012. "Establishment Turnover and the Evolution of Wage Inequality," CEF.UP Working Papers, Universidade do Porto, Faculdade de Economia do Porto 1202, Universidade do Porto, Faculdade de Economia do Porto.
  7. Huttunen, Kristiina & Moen, Jarle & Salvanes, Kjell G., 2006. "How Destructive Is Creative Destruction? The Costs of Worker Displacement," IZA Discussion Papers 2316, Institute for the Study of Labor (IZA).

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