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