Abstract

CATASTROPHIC JOB DESTRUCTION

Anabela Carneiro

Universidade do Porto and CEF.UP

Pedro Portugal

Banco de Portugal and NOVA School of Business and Economics

José Varejão

Universidade do Porto and CEF.UP

ABSTRACT

In this article we study the resilience of the Portuguese labor market, in terms of job

flows, employment and wage developments, in the context of the current recession. We single out the huge contribution of job destruction, especially due to the closing of existing firms, to the dramatic decline of total employment and increase of the unemployment rate. We also document the very large increase in the incidence of minimum wage earners and nominal wage freezes. We explore three different channels that may have amplified the employment response to the great recession: the credit channel, the wage rigidity channel, and the labor market segmentation channel. We uncover what we believe is convincing evidence that the severity of credit constraints played a significant role in the current job destruction process. Wage rigidity is seen to be associated with lower net job creation and higher failure rates of

firms. Finally, labor market segmentation seems to have favored a stronger job destruction that was facilitated by an increasing number of temporary workers.

Keywords: Job Destruction, Credit constraints, Wage rigidity, Segmentation.

JEL classifications: E24, J23, J63.

Acknowledgements: The authors would like to thank Albert Jaeger, António Antunes, Fernando Martins, Francesco Franco,Paulo Júlio and Sónia Félix for help with data. Helpful comments by Albert Jaeger, Alexander Hijzen, Daphne Nicolitsas, Lucrezia Reichlin, Nuno Alves, Pedro Martins and participants at the Euro Crisis Conference, Bank of Greece, Athens, and OECD Workshop on Labour Market Resilience are gratefully acknowledged. The authors also thank Lucena Vieira for excellent computer assistance. All the views expressed in this article remain with the authors and do not necessarily represent the views of the Bank of Portugal or the Eurosystem.

Correspondence:

Pedro Portugal

Banco de Portugal

R. do Ouro, 27, 1100