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Wages and the Risk of Displacement

Author

Listed:
  • Anabela Carneiro
  • Pedro 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. The results show that the fear of job loss generates bargaining 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

  • Anabela Carneiro & Pedro Portugal, 2003. "Wages and the Risk of Displacement," Working Papers w200310, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w200310
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    File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp200310.pdf
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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.

    More about this item

    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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