The anatomy of labor cost adjustment to demand shocks: Germany and Italy during the Great Recession

Francesco D'Amuri, Salvatore Lattanzio and Benjamin S. Smith ()
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Benjamin S. Smith: Federal Trade Commission

No 1411, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We shed light on the anatomy of labor cost adjustment in German and Italian manufacturing firms with more than 20 employees, leveraging matched employer employee-balance sheet data and an exogenous demand shifter that exploits the collapse in world trade during the Great Recession. Following a 1 per cent exogenous decrease in sales, the average German firm cuts wage growth by 0.19 per cent, twice as much as its Italian counterpart. The employment adjustment is gradual in both countries but more pronounced in Germany, where, however, firms in sectors hardest hit by the world trade collapse had been increasing employment in the run-up to the Great Recession. These results are not driven by differences in the response of hours per worker, in labor supply conditions, or in firms' exposure to the concurrent negative credit shock. Finally, we find that - in both countries - producer prices were reduced to a similar extent in response to the shock.

Keywords: labor demand; wages; employment; flexibility (search for similar items in EconPapers)
JEL-codes: J21 J23 J31 (search for similar items in EconPapers)
Date: 2023-06
New Economics Papers: this item is included in nep-eec and nep-lma
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