Uncertainty, firm heterogeneity and labour adjustments. Evidence from European countries

Firms are significantly affected by uncertainty about economic activity. Recent literature has shown that uncertainty is a factor of increasing importance in a globalized world, especially after its sharp increase during the last crisis. However, uncertainty did not impact all the firms in the same way. In this paper, we analyze if uncertainty may have different effects depending on firms’ characteristics. We would also like to understand how firms react to uncertainty diversely. Using data from the 3rd wave of the Wage Dynamic Network Survey for 25 European countries, we first construct a set of uncertainty indicators exploiting firms environment. We combine variability from country, sector and size at the firm level in order to disaggregate microeconomic uncertainty, which offers richer information than the traditional macroeconomic indicators. Secondly, we estimate the effect of uncertainty on labour adjustments. Results reveal that firms reduce hiring and increase the adjustment of labour demand with more frequency when uncertainty is higher. An increase of 1% in our uncertainty indicator increases the probability of having frozen hiring in between 21% to 35% during the period 2010-2013. Furthermore, other labour strategies have been also taken by firms, such as altering labour workforce: the more the uncertainty is, the more probability of recurring to individual layoffs. Significant effects have been found in firms subject to credit constraints, and country heterogeneity has also been studied: when EPL is stricter, labour response to uncertainty is also more significant.