Labour Market Adjustments to Financing Conditions under Sectoral Rigidities in the Euro Area

This paper analyses empirically the response of labour market indicators to changing financing conditions in a panel of 15 euro area countries from 1999Q1 to 2015Q4. Using a local projections approach, we estimate impulse responses of three margins of sectoral labour market adjustment – employment, hours worked and real wages. Consistent with recent results in the literature, we find contractionary financing shocks to depress all three indicators of the labour market. Furthermore, responses are asymmetric depending on the sign of the shock, different in magnitude depending on the sectoral composition, and sensitive to labour market institutions such as employment protection legislation and union density. Finally, labour market institutions seem to mainly affect the relative strength of the adjustment margins and not so much the overall response of the wage bill.