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Does Automatic Wage Indexation Destroy Jobs? A Machine Learning Approach

Author

Listed:
  • Gert Bijnens

    (National Bank of Belgium
    KU Leuven, VIVES)

  • Shyngys Karimov

    (Amazon UK Services Ltd.)

  • Jozef Konings

    (Nazarbayev University
    KU Leuven, VIVES)

Abstract

This paper analyzes the impact of automatic wage indexation on employment. To boost competitiveness and increase employment, Belgium suspended its automatic wage indexation system in 2015. This resulted in a 2% fall in real wages for all workers. In the absence of a suitable control group, we use machine learning for the counterfactual analysis. We artificially construct the control group for a difference-in-difference analysis based on the pre-treatment evolution of treated firms. We find a positive impact on employment of 1.2%, which corresponds to a labor demand elasticity of − 0.6. This effect is more pronounced for manufacturing firms, where the elasticity reaches − 1. These results show that a suspension of the automatic wage indexation mechanism can be effective in preserving employment.

Suggested Citation

  • Gert Bijnens & Shyngys Karimov & Jozef Konings, 2023. "Does Automatic Wage Indexation Destroy Jobs? A Machine Learning Approach," De Economist, Springer, vol. 171(1), pages 85-117, March.
    • Handle: RePEc:kap:decono:v:171:y:2023:i:1:d:10.1007_s10645-023-09418-y
    DOI: 10.1007/s10645-023-09418-y
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    Cited by:

    1. Cockx, Bart & Desiere, Sam, 2024. "Labour costs and the decision to hire the first employee," European Economic Review, Elsevier, vol. 170(C).

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    More about this item

    Keywords

    Labor demand; Wage elasticity; Counterfactual analysis; Machine learning;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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