How do European firms adjust their labour costs when nominal wages are rigid? |
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Authors: | Jan Babecký Philip Du Caju Theodora Kosma Martina Lawless Julián Messina Tairi Rõõm |
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Institution: | 1. Department of Management, College of Business and Economics, California State University, East Bay, Hayward, CA 94542, United States;2. Department of Economics, College of Business and Economics, California State University, East Bay, Hayward, CA 94542, United States;3. Mathematica Policy Research, 505 14th Street, Suite 800, Oakland, CA 94612, United States;1. Department of Applied Economics III, Complutense University of Madrid, School of Economics and Business, Campus de Somosaguas, 28223 Pozuelo de Alarcón, Madrid, Spain;2. Department of Finance, University of Alicante, Ap. 99, E-03080 Alicante, Spain;3. Department of Economics and Business, University CEU Cardenal Herrera, C/Carmelitas 3, 03203 Elche, Alicante, Spain |
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Abstract: | Although workers' nominal wages are seldom cut, firms have multiple options available if they require adjustments in their wage bills. We broaden the analysis of relative (in)flexibility in labour costs by investigating the use of other margins of labour cost adjustment at the firm level beyond base wages. Using data from a unique survey, we find that European firms make extensive use of other components of compensation to adjust the cost of labour. Interestingly, firms facing base wage rigidity are more likely to use alternative margins of labour cost adjustment; therefore there appears to be some degree of substitutability between wage flexibility and the flexibility of other cost components. Changes in bonuses and non-pay benefits are some of the potential margins firms use to reduce costs. We also show how the margins of adjustment chosen are affected by unionisation and firm and worker characteristics. |
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