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THE MARGINS OF LABOUR COST ADJUSTMENT:

SURVEY EVIDENCE FROM EUROPEAN FIRMS

 

Jan Babecký

Czech National Bank

 

Philip Du Caju

National Bank of Belgium

 

Theodora Kosma

Bank of Greece

 

Martina Lawless

Central Bank and Financial Services Authority of Ireland

 

Julián Messina

World Bank and University of Girona

 

Tairi Rõõm,

Bank of Estonia

 

ABSTRACT

Firms have multiple options at the time of adjusting their wage bills. However, previous literature has mainly focused on base wages. We broaden the analysis beyond downward rigidity in base wages by investigating the use of other margins of labour cost adjustment at the firm level. Using data from a unique survey, we find that firms make frequent use of other, more flexible, components of compensation to adjust the cost of labour. 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 firm and worker characteristics.

Keywords: labour costs, wage rigidity, firm survey, European Union

JEL codes: J30, C81, P5

Acknowledgments: The work was conducted within the framework of the Wage Dynamics Network coordinated by the European Central Bank. We thank for helpful comments Giuseppe Bertola, Aleš Bulíř, Silvia Fabiani, Gabriel Fagan, Jaromír Gottwald, Jan Hošek, Juan Jimeno, Ana Lamo, Frank Smets, an anonymous referee of the ECB WP series and all the participants of the WDN meetings, seminars at the Bank of Estonia and the Czech National Bank. The opinions expressed in this paper are solely those of the authors and do not necessarily reflect the views of their respective institutions.

 

Correspondence:

Theodora Kosma

Economic Research Department,

Bank of Greece, 21 E. Venizelos Ave.,

10250 Athens, Greece, Tel.:+30-210-320 2642

Email: dkosma@bankofgreece.gr


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