7/2010 Giuseppe Bertola, Aurelijus Dabušinskas, Marco Hoeberichts, Mario Izquierdo, Claudia Kwapil, Jérémi Montornès and Daniel Radowski. Price, wage and employment response to shocks: Evidence from the WDN survey

Working Papers of Eesti Pank. No 7/2010

PRICE, WAGE AND EMPLOYMENT RESPONSE TO SHOCKS: EVIDENCE FROM THE WDN SURVEY1

Giuseppe Bertola2, Aurelijus Dabušinskas3, Marco Hoeberichts4, Mario Izquierdo5, Claudia Kwapil6, Jérémi Montornès7 and Daniel Radowski8

 

This paper analyses information from survey data collected in the framework of the Eurosystem's Wage Dynamics Network (WDN) on patterns of firm-level adjustment to shocks. We document that the relative intensity and the character of price vs. cost and wage vs. employment adjustments in response to cost-push shocks depend - in theoretically sensible ways - on the intensity of competition in firms' product markets, on the importance of collective wage bargaining and on other structural and institutional features of firms and of their environment. Focusing on the pass-through of cost shocks to prices, our results suggest that the pass-through is lower in highly competitive firms. Furthermore, a high degree of employment protection and collective wage agreements tend to make this pass-through stronger.
JEL Code: J31, J38, P50
Key words: wage bargaining, labour-market institutions, survey data, European Union

1 This work was conducted within the framework of the Wage Dynamics Network (WDN), coordinated by the European Central Bank and aimed at studying in depth the features and sources of wage and labour-cost dynamics and their implications for monetary policy in the euro area. We thank Julio Rotemberg, Juan Francisco Jimeno and the participants of the WDN for their valuable comments. Only the authors are responsible for views and opinions expressed in this paper.
2 Università di Torino; e-mail: giuseppe.bertola [at] unito.it
3 Eesti Pank; e-mail: aurelijus.dabusinskas [at] eestipank.ee
4 De Nederlandsche Bank; e-mail: m.m.hoeberichts [at] dnb.nl
5 Banco de España; e-mail: mizquierdo [at] bde.es
6 Oesterreichische Nationalbank; e-mail: claudia.kwapil [at] oenb.at
7 Banque de France; e-mail: jeremi.montornes [at] banque-france.fr
8 Deutsche Bundesbank; e-mail: daniel.radowski [at] bundesbank.de

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction
2. Data and theory
2.1. Available data
2.2. Relevant theory
3. Adjustment to cost and wage shocks
3.1. Descriptive evidence
3.2. Firms adjustment strategies and some relevant covariates
3.3. Explaining the response to shocks
3.4. A counterfactual exercise
4. Cost-cutting strategies
4.1. Descriptive evidence
4.2. Adjustment channels and some relevant covariates
4.3. A counterfactual exercise
5. Conclusions
References
Appendix A. Survey questions
Appendix B. Theoretical impact of shocks on wages and employment
Appendix C. Details on empirical results

Price, Wage and Employment Response to Shocks: Evidence from the WDN Survey, Working Papers of Eesti Pank No 7/2010 (PDF*)

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