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Wage rigidity and employment adjustment at the firm level: Evidence from survey data

Fernando Martins (), Daniel Dias () and Carlos Marques ()

No 4944, EcoMod2013 from EcoMod

Abstract: This paper uses firm level survey data from Portugal to investigate how firms adjust their labour costs in the presence of wage rigidities. In particular, the paper contributes to the literature by analysing how firms, in the presence of wage rigidity, combine different channels of labour-cost adjustment in response to adverse shocks. Wage rigidity is expected to have implications for unemployment because, in the face of negative shocks, employment adjustment is likely to be larger when wages are rigid downwards. Wage rigidity is also thought to have important implications for monetary policy, as it may condition the inflation target that monetary authorities should pursue. If nominal wages were perfectly flexible it would be optimal to aim at zero inflation but, in the presence of downward nominal wage rigidity, a certain amount of inflation may be required to "grease the wheels" of the labour market by easing reductions in real wages. Model estimated by single equation methods (probit model). Recursive triangular model. We conclude that base-wage flexibility has a strong positive impact on employment, and that such positive impact has been significantly strengthened by the possibility of firms resorting to alternative margins of labour cost adjustment, like more flexible compensation components (bonus, benefits and promotions) and the recruitment of new employees at wages lower than those received by the employees that have left the firm.

Keywords: Portugal; Labor market issues; Microsimulation models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dcm, nep-lab and nep-mac
Date: 2013-06-21
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Journal Article: Wage rigidity and employment adjustment at the firm level: Evidence from survey data (2013) Downloads
Working Paper: Wage rigidity and employment adjustment at the firm level: evidence from survey data (2012) Downloads
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