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Wages and the Risk of Displacement

Author Info

  • 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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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;

Other versions of this item:

Find related papers by 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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  1. Murphy, Kevin M & Topel, Robert H, 1985. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 370-79, October.
  2. 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.
  3. José Mata & Pedro Portugal, 2001. "The Survival of New Domestic and Foreign Owned Firms," Working Papers w200101, Banco de Portugal, Economics and Research Department.
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  9. David Margolis, 1999. "Part-Year Employment, Slow Reemployment and Earnings Losses : The Case of Worker Displacement in France," Working Papers 99-04, Centre de Recherche en Economie et Statistique.
  10. Guimaraes, Paulo & Mata, José & Portugal, Pedro, 1995. "The Survival of New Plants: Start-up Conditions and Post-entry Evolution," CEPR Discussion Papers 1203, C.E.P.R. Discussion Papers.
  11. David Margolis, 2000. "Worker Displacement in France," Working Papers 2000-01, Centre de Recherche en Economie et Statistique.
  12. Stevens, Ann Huff, 1997. "Persistent Effects of Job Displacement: The Importance of Multiple Job Losses," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages 165-88, January.
  13. Louis S. Jacobson & Robert J. LaLonde & Daniel Sullivan, 1992. "Earnings Losses of Displaced Workers," Upjohn Working Papers and Journal Articles 92-11, W.E. Upjohn Institute for Employment Research.
  14. repec:fth:inseep:9904 is not listed on IDEAS
  15. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "The Growth And Failure Of U.S. Manufacturing Plants," Papers 1-87-5, Pennsylvania State - Department of Economics.
  16. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  17. 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.
  18. Mata, Jose & Portugal, Pedro, 1994. "Life Duration of New Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 227-45, September.
  19. Kumar, M S, 1985. "Growth, Acquisition Activity and Firm Size: Evidence from the United Kingdom," Journal of Industrial Economics, Wiley Blackwell, vol. 33(3), pages 327-38, March.
  20. 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.
  21. 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, June.
  22. 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.
  23. Dunne, T. & Roberts, M.J., 1990. "Wages And The Risk Of Plant Closing," Papers 6-90-2, Pennsylvania State - Department of Economics.
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Cited by:

  1. 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.
  2. Gielen, A. C. & van Ours, J.C., 2006. "Why do Worker-Firm Matches Dissolve?," Discussion Paper 2006-57, Tilburg University, Center for Economic Research.
  3. 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.
  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. Gielen, Anne C. & van Ours, Jan C., 2010. "Layoffs, quits and wage negotiations," Economics Letters, Elsevier, vol. 109(2), pages 108-111, November.
  6. 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.
  7. 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.
  8. 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).
  9. 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.

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