4/2009 Jan Babecký, Philip Du Caju, Theodora Kosma, Martina Lawless, Julián Messina and Tairi Rõõm. The margins of labour cost adjustment: Survey evidence from European firms

Working Papers of Eesti Pank. No. 4/2009

Firms have multiple options at the time of adjusting their wage bills. However, previous literature has mainly focused on base wages. We broaden the analysis beyond downward rigidity in base wages by investigating the use of other margins of labour cost adjustment at the firm level. Using data from a unique survey, we find that firms make frequent use of other, more flexible, components of compensation to adjust the cost of labour. Changes in bonuses and non-pay benefits are some of the potential margins firms use to reduce costs. We also show how the margins of adjustment chosen are affected by firm and worker characteristics.
JEL Code: J30, C81, P5
Key words: labour costs, wage rigidity, firm survey, European Union

*Author affiliations: Jan Babecký (Czech National Bank, jan.babecky [at] cnb.cz), Philip Du Caju (National Bank of Belgium, philip.ducaju [at] nbb.be), Theodora Kosma (Bank of Greece, tkosma [at] bankofgreece.gr), Martina Lawless (Central Bank and Financial Services Authority of Ireland, martina.lawless [at] centralbank.ie), Julián Messina (World Bank and University of Girona, jmessina [at] worldbank.org) and Tairi Rõõm (Bank of Estonia, tairi.room [at] epbe.ee). The work was conducted within the framework of the Wage Dynamics Network coordinated by the European Central Bank. We thank for helpful comments Giuseppe Bertola, Aleš Bulír, Silvia Fabiani, Gabriel Fagan, Jaromír Gottwald, Jan Hošek, Juan Jimeno, Ana Lamo, Frank Smets, an anonymous referee of the ECB WP series and all the participants of the WDN meetings, seminars at the Bank of Estonia and the Czech National Bank.

Contents

1. Introduction
2. Survey Design and Sample Characteristics
3. Non-wage cost-cutting strategies
4. The choice among non-wage cost-cutting strategies
5. Wage Rigidity and Non-Wage Labour Cost Adjustment
6. Conclusions
References
Appendix 1. Survey characteristics
Appendix 2. Sample characteristics
Appendix 3. Employment adjusted sampling weight
Appendix 4. Questions used for the creation of the variables
Appendix 5. Additional results
Appendix 6. Variable definitions

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