Shocks and labour cost adjustment: evidence from a survey of European firms

We use firm-level survey data from 25 EU countries to analyse how firms adjusted their labour costs (employment, wages, and hours) in response to shocks in the years 2008–13. We find that the pattern of adjustment is not much affected by the type of the shock, but differs according to the direction of the shock (positive or negative), its size, and persistence. In 2010–13, firms responding to negative shocks were most likely to reduce employment, then hourly wages, and then hours worked. Results for the 2008–9 period indicate that the ranking might change during deep recessions as the likelihood of wage cuts increases. In response to positive shocks in 2010–13, firms were more likely to increase wages, followed by increases in employment, and then hours worked. Finally, we found that employment and hours cuts are less likely following negative shocks in countries with decentralized wage bargaining.