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Wages, labor or prices: how do firms react to shocks?

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  • Dhyne, Emmanuel
  • Druant, Martine

Abstract

Survey results in 15 European countries for almost 15,000 firms reveal that Belgian firms react more than the average European firm to adverse shocks by reducing permanent and temporary employment. On the basis of a firm-level analysis, this paper confirms that the different reaction to shocks is significant and investigates what factors explain this difference. Although the explanatory value of the variables is limited, most of the explanatory power of the model being associated with the dummy variables coding for firm size, sector and country, the variables investigated provide valuable information. The importance of wage bargaining above the firm level, the automatic system of index-linking wages to past inflation, the limited use of flexible pay, the high share of low-skilled blue-collar workers, the labour intensive production process as well as the less stringent legislation with respect to the protection against dismissal are at the basis of the stronger employment reaction of Belgian firms. On the contrary, employment is safeguarded by the presence of many small firms and a wage cushion. JEL Classification: D21, E30, J31

Suggested Citation

  • Dhyne, Emmanuel & Druant, Martine, 2010. "Wages, labor or prices: how do firms react to shocks?," Working Paper Series 1224, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20101224
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    References listed on IDEAS

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    1. Du Caju, Philip & Fuss, Catherine & Wintr, Ladislav, 2012. "Sectoral differences in downward real wage rigidity: workforce composition, institutions, technology and competition," Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 45(1), pages 7-22.
    2. P. Du Caju & C. Fuss & L. Wintr, 2012. "Sectoral differences in downward real wage rigidity: workforce composition, institutions, technology and competition [Branchenspezifische Unterschiede in der Abwärtsreallohnstarrheit: Arbeitskrafts," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 45(1), pages 7-22, March.
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    9. Jan Babecký & Philip Du Caju & Theodora Kosma & Martina Lawless & Julián Messina & Tairi Rõõm, 2010. "Downward Nominal and Real Wage Rigidity: Survey Evidence from European Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 884-910, December.
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    11. Fuss, Catherine & Wintr, Ladislav, 2009. "Rigid labour compensation and flexible employment? Firm-level evidence with regard to productivity for Belgium," Working Paper Series 1021, European Central Bank.
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    13. M. Druant & Ph. Du Caju & Ph. Delhez, 2008. "Results of the Bank’s survey of wage-setting in Belgian firms," Economic Review, National Bank of Belgium, issue iii, pages 49-73, September.
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    Cited by:

    1. G. de Walque & M. Druant & Ph. Du Caju & C. Fuss, 2010. "Lessons of the Wage Dynamics Network," Economic Review, National Bank of Belgium, issue i, pages 55-75, June.
    2. Bergin, Adele & Kelly, Elish & McGuinness, Seamus, 2012. "Explaining Changes in Earnings and Labour Costs During the Recession," Papers EC9, Economic and Social Research Institute (ESRI).
    3. Sabien Dobbelaere & Catherine Fuss & Mark Vancauteren, 2022. "Does offshoring shape labor market imperfections? A comparative analysis of Belgian and Dutch firms," Working Paper Research 425, National Bank of Belgium.
    4. Cronin, Hugh & McGuinness, Seamus, 2014. "Examining the Relationship between Employee Resistance to Changes in Job Conditions and Wider Organisational Change: Evidence from Ireland," Papers WP490, Economic and Social Research Institute (ESRI).
    5. Nagayasu, Jun, 2012. "Regional inflation and industrial structure in monetary union," MPRA Paper 37310, University Library of Munich, Germany.
    6. Brian Micallef, 2016. "The Adjustment of Maltese Firms to the Post-crisis Economic Environment: Evidence from a Firm-level Survey," International Business Research, Canadian Center of Science and Education, vol. 9(9), pages 122-133, September.
    7. Gani Ramadani, 2017. "Firms’ responses to shocks by price, wage and employment in Macedonia," Working Papers 2017-02, National Bank of the Republic of North Macedonia.

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    More about this item

    Keywords

    cost-push shocks; demand shock; indexation; survey; wage bargaining institutions; wage rigidity;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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