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Wage rigidity and employment adjustment at the firm level: evidence from survey data

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  • Daniel Dias
  • Carlos Robalo Marques
  • Fernando Martins

Abstract

This paper uses firm level survey data from Portugal to investigate how firms adjust their labour costs in the presence of wage rigidities. We document that Portuguese firms, besides reducing employment or freezing nominal base wages, also make frequent use of other cost-cutting strategies, like freezing or cutting bonus and other monetary or non-monetary benefits, slowing down or freezing the rate at which promotions are filled, or recruiting new employees at wageslower than those received by the employees that have left the firm. We show that the utilization of these different adjustment strategies is affected by workers’ and firms’ attributes, as well as by some indicators of the economic environment in which firms operate. More importantly, we provide evidence that firms with more flexible base wages are less likely to reduce employment, and that such effect may be significantly strengthened by the availability of alternative labourcost adjustment margins that firms can use in bad times.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201212.

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Date of creation: 2012
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Handle: RePEc:ptu:wpaper:w201212

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Citations

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Cited by:
  1. Fernando Martins, 2013. "Survey evidence on price and wage rigidities in Portugal," Working Papers w201312, Banco de Portugal, Economics and Research Department.
  2. Daniel Dias & Carlos Robalo Marques & Fernando Martins, 2012. "Labour cost-cutting strategies microeconomic evidence from survey data," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  3. Pedro S. Martins, 2014. "30,000 minimum wages: The economic effects of collective agreement extensions," Working Papers 51, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.

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