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Pension shocks and wages

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  • Adrjan, Pawel
  • Bell, Brian

Abstract

How do wages respond to firm-level idiosyncratic cost shocks? We create a unique dataset that links longitudinal data on workers’ compensation to the unexpected costs that UK firms have been forced to pay to plug large deficits in their legacy defined benefit pension plans. We show that firms are able to share the burden of such costs when a significant share of their workers are current or former members of the plan. We also investigate how compensation responds to the closure of defined benefit plans to future benefit accrual. We find that firms are able to use such closures to effectively reduce total compensation of workers who are plan members. These results point to significant frictions in the labour market, which we show are a direct result of the pension arrangement that workers have. Closing schemes has an implicit cost for firms since it reduces the frictions that workers face.

Suggested Citation

  • Adrjan, Pawel & Bell, Brian, 2018. "Pension shocks and wages," LSE Research Online Documents on Economics 88687, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:88687
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    File URL: http://eprints.lse.ac.uk/88687/
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    References listed on IDEAS

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    1. Bunn, Philip & Smietanka, Pawel & Mizen, Paul, 2018. "Growing pension deficits and the expenditure decisions of UK companies," Bank of England working papers 714, Bank of England.
    2. John Van Reenen, 1996. "The Creation and Capture of Rents: Wages and Innovation in a Panel of U. K. Companies," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(1), pages 195-226.
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    5. Neeru Chaudhry & Hue Hwa Au Yong & Chris Veld, 2017. "How does the Funding Status of Defined Benefit Pension Plans Affect Investment Decisions of Firms in the United States?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 44(1-2), pages 196-235, January.
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    7. Joshua D. Rauh, 2006. "Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans," Journal of Finance, American Finance Association, vol. 61(1), pages 33-71, February.
    8. Haverstick, Kelly & Munnell, Alicia H. & Sanzenbacher, Geoffrey & Soto, Mauricio, 2010. "Pension type, tenure, and job mobility," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(4), pages 609-625, October.
    9. Richard Disney & Carl Emmerson, 2002. "Choice of pension scheme and job mobility in Britain," IFS Working Papers W02/09, Institute for Fiscal Studies.
    10. Patrick Kline & Neviana Petkova & Heidi Williams & Owen Zidar, 2019. "Who Profits from Patents? Rent-Sharing at Innovative Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(3), pages 1343-1404.
    11. Alicia H. Munnell & Mauricio Soto, 2007. "Why Are Companies Freezing Their Pensions?," Working Papers, Center for Retirement Research at Boston College wp2007-22, Center for Retirement Research, revised Dec 2007.
    12. Andrew Garin & Filipe Silverio, 2017. "How Does Firm Performance Affect Wages? Evidence from Idiosyncratic Export Shocks," 2017 Papers pga940, Job Market Papers.
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    Cited by:

    1. Andreas Teichgraber & John Van Reenen, 2021. "Have Productivity and Pay Decoupled in the UK?," International Productivity Monitor, Centre for the Study of Living Standards, vol. 41, pages 31-60, Fall.
    2. Kaifala, Gabriel B. & Paisey, Catriona & Paisey, Nicholas J., 2021. "The UK pensions landscape – A critique of the role of accountants and accounting technologies in the treatment of social and societal risks," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 75(C).
    3. Pawel Adrjan, 2018. "Risky Business? Earnings Prospects of Employees at Young Firms," Economics Series Working Papers 852, University of Oxford, Department of Economics.
    4. Rik Dillingh & Maria Zumbuehl, 2021. "Pension Payout Preferences," CPB Discussion Paper 431, CPB Netherlands Bureau for Economic Policy Analysis.

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    More about this item

    Keywords

    wages; pensions; frictions;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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