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How Does Firm Performance Affect Wages? Evidence from Idiosyncratic Export Shocks

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  • Andrew Garin
  • Filipe Silverio

Abstract

In the canonical competitive labor market model, firms are wage-takers and idiosyncratic shocks to individual firms do not affect wages. However, when labor markets are frictional, wages may directly depend on firm-specific factors. We test how sensitive wages are to firm-level labor demand by estimating the incidence of idiosyncratic export demand shocks on the wages of incumbent workers in Portugal during the Great Recession (2008-2010). Using detailed export records, we construct measures of firm exposure to unanticipated shocks to the demands of different countries for specific products. The shocks predict changes in output and payroll at affected firms, but not at other similar firms. We combine the export demand measures with firm balance sheet data and matched longitudinal administrative employer-employee records to estimate the impact of idiosyncratic firm-level demand shocks on employee outcomes. We find that idiosyncratic shocks that decreased sales or value added by 10 percent caused wages to grow 1.5 percent less for incumbent workers who were employed by affected firms in 2007. Furthermore, we find that these pass-through effects are stronger in industries with higher durability of employment relationships and lower employee turnover rates. These results support a model in which barriers to replacing incumbent workers give rise to internal labor markets within the firm, exposing workers to their employersâ idiosyncratic conditions.

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  • Andrew Garin & Filipe Silverio, 2017. "How Does Firm Performance Affect Wages? Evidence from Idiosyncratic Export Shocks," 2017 Papers pga940, Job Market Papers.
  • Handle: RePEc:jmp:jm2017:pga940
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    Cited by:

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    2. Gigout, Timothee & Bricongne, Jean-Charles, 2019. "Explaining the Persistent Effect of Demand Uncertainty on Firm Growth," MPRA Paper 94228, University Library of Munich, Germany.
    3. Kerwin Kofi Charles & Matthew S. Johnson & Melvin Stephens Jr. & Do Q. Lee, 2019. "Demand Conditions and Worker Safety: Evidence from Price Shocks in Mining," NBER Working Papers 26401, National Bureau of Economic Research, Inc.
    4. Kirill Borusyak & Peter Hull & Xavier Jaravel, 2018. "Quasi-Experimental Shift-Share Research Designs," Papers 1806.01221, arXiv.org, revised Dec 2020.
    5. Adrjan, Pawel & Bell, Brian, 2018. "Pension shocks and wages," LSE Research Online Documents on Economics 88687, London School of Economics and Political Science, LSE Library.
    6. Anna Sokolova & Todd Sorensen, 2021. "Monopsony in Labor Markets: A Meta-Analysis," ILR Review, Cornell University, ILR School, vol. 74(1), pages 27-55, January.
    7. Patrick Kline & Neviana Petkova & Heidi Williams & Owen Zidar, 2019. "Who Profits from Patents? Rent-Sharing at Innovative Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 134(3), pages 1343-1404.
    8. Simon Jäger & Benjamin Schoefer & Samuel Young & Josef Zweimüller, 2020. "Wages and the Value of Nonemployment," The Quarterly Journal of Economics, Oxford University Press, vol. 135(4), pages 1905-1963.
    9. Ludovic Panon, 2020. "Labor Share, Foreign Demand and Superstar Exporters," Sciences Po publications 2020-12, Sciences Po.
    10. Ettore Panetti & Edoardo M. Acabbi & Alessandro Sforza, 2019. "The Financial Channels of Labor Rigidities: Evidence from Portugal," Working Papers w201915, Banco de Portugal, Economics and Research Department.
    11. Gigout, Timothee, 2019. "Firm dynamics in an global and uncertain economy," MPRA Paper 96569, University Library of Munich, Germany, revised 16 Oct 2019.

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    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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