Flexible Wages and the Costs of Job Displacement

Sofía Fernández Guerrico and Ilan Tojerow

No 14942, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper investigates whether flexible pay increases the wage costs of job displacement. We use quasi-exogenous variation in the timing of job loss due to mass layoffs spanning over an institutional reform that restricted single-employer bargaining, the Belgian Wage Norm in 1996. We find that average earnings losses over a ten-year period after displacement are 10 percentage points larger under flexible pay. Workers displaced from jobs with higher employer-specific wage premiums-service sector and white-collar-benefit the most from restricted single-employer bargaining as their earnings fully converge to non-displaced workers' earnings within three years. We show that the differences in earnings losses across wage-setting systems are not driven by fluctuations in the business cycle. Finally, the wage-setting reform had similar effects on female workers, though it did not narrow the gender gap in pre-layoff wages. Our results suggest that reduced pay flexibility may help displaced workers catch up faster to non-displaced workers' pay premium ladder conditional on re-employment.

Keywords: bargaining; wage flexibility; job displacement (search for similar items in EconPapers)
JEL-codes: J31 J51 J63 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2021-12
New Economics Papers: this item is included in nep-eur, nep-hrm and nep-lma
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