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Wages and the Risk of Displacement

Author

Listed:
  • 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.

Suggested Citation

  • Carneiro, Anabela & Portugal, Pedro, 2006. "Wages and the Risk of Displacement," IZA Discussion Papers 1926, Institute for the Study of Labor (IZA).
    • Handle: RePEc:iza:izadps:dp1926
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    References listed on IDEAS

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    1. Mata, Jose & Portugal, Pedro, 1994. "Life Duration of New Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 227-245, September.
    2. Jacobson, Louis S & LaLonde, Robert J & Sullivan, Daniel G, 1993. "Earnings Losses of Displaced Workers," American Economic Review, American Economic Association, vol. 83(4), pages 685-709, September.
    3. David Margolis, 1999. "Part-Year Employment, Slow Reemployment and Earnings Losses : The Case of Worker Displacement in France," Working Papers 99-04, Center for Research in Economics and Statistics.
    4. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
    5. Mata, Jose & Portugal, Pedro & Guimaraes, Paulo, 1995. "The survival of new plants: Start-up conditions and post-entry evolution," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 459-481, December.
    6. 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, January.
    7. 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, vol. 75(3), pages 309-317, May.
    8. Andrew B. Bernard & J. Bradford Jensen, 2002. "The Deaths of Manufacturing Plants," NBER Working Papers 9026, National Bureau of Economic Research, Inc.
    9. David Margolis, 1999. "Worker Displacement in France," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00370589, HAL.
    10. 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.
    11. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    12. Blanchflower, David G, 1991. "Fear, Unemployment and Pay Flexibility," Economic Journal, Royal Economic Society, vol. 101(406), pages 483-496, May.
    13. Timothy Dunne & Mark J. Roberts, 1990. "Wages and The Rist of Plant Closings," Working Papers 90-6, Center for Economic Studies, U.S. Census Bureau.
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    22. repec:crs:wpaper:9904 is not listed on IDEAS
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    24. 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.
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    Cited by:

    1. Gielen, A. C. & van Ours, J.C., 2006. "Why do Worker-Firm Matches Dissolve?," Discussion Paper 2006-57, Tilburg University, Center for Economic Research.
    2. Gielen, Anne C. & van Ours, Jan C., 2010. "Layoffs, quits and wage negotiations," Economics Letters, Elsevier, vol. 109(2), pages 108-111, November.
    3. Schwerdt, Guido, 2011. "Labor turnover before plant closure: "Leaving the sinking ship" vs. "Captain throwing ballast overboard"," Labour Economics, Elsevier, vol. 18(1), pages 93-101, January.
    4. Anabela Carneiro & José Varejão, 2012. "Establishment Turnover and the Evolution of Wage Inequality," CEF.UP Working Papers 1202, Universidade do Porto, Faculdade de Economia do Porto.
    5. Luiz A. Esteves, 2008. "Risk of Firm Closure and Wages in Brazil: Compensating Wage Di erentials or Bargaining Concessions?," Working Papers 0077, Universidade Federal do Paraná, Department of Economics.
    6. 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).
    7. 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 2006-03, Center for Economic Studies, U.S. Census Bureau.
    8. Verónica Alaimo & Mariano Bosch & David S. Kaplan & Carmen Pagés & Laura Ripani, 2015. "Jobs for Growth," IDB Publications (Books), Inter-American Development Bank, number 90977, February.
    9. 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.
    10. 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.
    11. 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.

    More about this item

    Keywords

    displacement risk; concessions; wages;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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